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MSml/d r^yn/^ix-'^ 



95th Congress 1 
2d Session / 



COMMITTEE PEINT 



SMALL BUSINESS ISS 
PRIORITIES— 19 




BY STAFF MEMBERS OF THE 

SELECT COMMITTEE ON SMALL BUSINESS 
UNITED STATES SENATE 

WITH 

REPRESENTATIVES 

OF 

SMALL BUSINESS ORGANIZATIONS 




NOVEMBER 16, 1978 



Printed for the use of the Select Committee on Small Business 



40-287 



U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1979 



SELECT COMMITTEE ON SMALL BUSINESS 
GAYLORD NELSON, Wisconsin, Chairman 
THOMAS J. McINTYRE, New Hampshire LOWELL P. WEICKER, Jr., Connecticut 
SAM NUNN, Georgia DEWEY F. BARTLETT, Oklahoma 

WILLIAM D. HATHAWAY, Maine BOB PACKWOOD, Oregon 

FLOYD K. HASKELL, Colorado 
JOHN C. CULVER, Iowa 

William B. Cherkasky, Executive Director 

Herbert L. Spira, Chief Counsel 
Sandra K. Klatt, Professional Staff Member 
Corey M. Rosen, Professional Staff Member 
Robert S. Stokes, Professional Staff Member 
Gerald D. Sturges, Professional Staff Member 
Denis R. Zeoar, Professional Staff Member 
Robert J. Dotchin, Minority Staff Director 

(ID 



CONTENTS 



Statement of Senator — 

Nelson, Hon. Gaylord, a U.S. Senator from the State of Wisconsin, Pa £° 

and chairman, Senate Small Business Committee 2 

Statement of — 

Brown, Lee, on behalf of the Smaller Manufacturers Council of 

Pittsburgh 27 

Carroll, Frank, Small Business Service Bureau, Boston, Mass 18 

Davidson, Julius, on behalf of the Service Corporation of Retired 

Executives 88 

DeBolt, Donald 14 

Diss, William T., on behalf of the American Institute of Certified 

Public Accountants 70 

Feilar, Frank, director, Action Programs and Administration, National 

Restaurant Association 94 

Grollman, Jack, Association of Independent Corrugated Converters. 93 

Harding, Ralph, president, Society of the Plastics Industry 95 

Hess, Dr. Earl, on behalf of the American Council of Independent 

Laboratories 30 

Johnson, Robert, National Cable Televison Association 53 

Kobell, Ruth, National Farmers Union 95 

Leffler, Marvin, chairman of the board, National Council of Salesmen's 

Organiz ations, Inc 67 

Leonard, Will E., on behalf of the Association of Steel Distributors,- 80 

Levitt, Arthur, Jr., chairman, American Stock Exchange, Inc 49 

Nagy, Gerald, National Home Furnishings Association 50 

Richard, Edward H., chairman, Citizens Committee on Paperwork 

Reduction 9 

Rustin, William, Gastonia, N.C 51 

Seeds, George A., first vice president, National Association of Whole- 
saler-Distributors 3 

Seifert, Randolph J., on behalf of the National Home Improvement 

Association 48 

Simone, Joseph, representing the Saratoga Small Business Council, 

the New York Regional Small Business Council, and the Greater 

Capital Region of Small Business Councils 21 

Stults, Walter B., executive vice president, National Association of 

Small Business Investment Companies 16 

Unsell, Lloyd, Independent Petroleum Association of America 96 

Wenning, Tom, of Bison & Wenning 66 

Wolf, Steven A., on behalf of the National Family Business Council 90 

APPENDIX 

Statement of the Independent Bakers Association on the tax bill, H.R. 

13511, now the subject of House Senate Conference, October 12, 1978 107 

Letter dated October 26, 1978, to Senator Gaylord Nelson, chairman, 
Senate Select Committee on Small Business, from Daniel T. Kingsley, 
executive director, National Venture Capital Association 108 

Letter dated October 26, 1978, to William B. Cherkasky, staff director, 
Senate Select Committee on Small Business, from Walter M. Kiplinger, 
Jr., Washington representative, Cast Metals Federation 108 

Letter dated November 6, 1978, to William B. Cherkasky, staff director, 
Senate Select Committee on Small Business, from Jerome L. Dreyer, 
executive vice president, ADAPSO 108 

Letter dated November 7, 1978, to William B. Cherkasky, executive 
director, Senate Select Committee on Small Business, from Louis 
Micheln, executive vice president, Oshkosh Association of Manufacturers 
and Commerce 109 

(in) 



IV 

Letter dated November 8, 1978, to William B. Cherkasky, executive 

director, Senate Select Committee on Small Business, from Warren A. P»w 
Cole, president, National Micrographics Association 111 

Letter dated November 9, 1978, to William B. Cherkasky, executive 
director, Senate Select Committee on Small Business, from Leon L. 
Lemaire, president, Connecticut Small Business Federation 112 

Letter dated November 10, 1978, to William B. Cherkasky, executive 
director, Senate Select Committee on Small Business, from Dr. Robert 
W. Pricer, director, Small Business Development Center, University of 
Wisconsin-Extension 113 

Letter dated November 13, 1978. to Senator Gaylord Nelson, chairman, 
Senate Select Committee on Small Business, from Gerard P. Panaro, 
associate director, Government Affairs, Associated Retail Bakers of 
America 115 

Letter dated November 14, 1978, to Senator Gaylord Nelson, chairman, 
Senate Select Committee on Small Business, from Ivan D. Fugate, 
president, Independent Bankers Association of America 119 

Letter dated November 14, 1978, to Senator Gaylord Nelson, chairman, 
Senate Select Committee on Small Business, from Phillip R. Chisholm, 
director of legislative affairs, National Oil Jobbers Council 121 

Letter dated November 14, 1978, to Senator Gaylord Nelson, chairman, 
Senate Select Committee on Small Business, from Basil J. Mezines, 
Law Offices of Stein, Mitchell and Mezines 125 

Letter dated November 14, 1978, to Senator Gaylord Nelson, chairman, 
Senate Select Committee on Small Business, from Jimmy D. Johnson, 
Ph. D., executive director, Association of Physical Fitness Centers 126 

A paper on the future potentials for small business, prepared by the Ceda 

Corp., Leonard A. Blackshear, executive director, November 15, 1978__ 127 

Letter dated November 17, 1978, to Herbert L. Spira, chief counsel, 
Senate Select Committee on Small Business, from James S. Hostetler, 
Law Offices of Chapman, Duff and Paul 129 

Letter dated November 17, 1978, to William B. Cherkasky, executive 
director, Senate Select Committee on Small Business, from Otis L. Lee, 
Jr., associate director, Center for Small Business i 145 

Letter dated November 17, 1978, to William B. Cherkasky, executive 
director, Senate Select Committee on Small Business, from Daniel T. 
Kingsley, executive director, National Venture Capital Association 147 

Letter dated November 17, 1978, to Senator Gaylord Nelson, chairman, 
Senate Select Committee on Small Business, from Duane D. Pearsall, 
member, Steering Committee, Small Business Council, Denver Chamber 
of Commerce 148 

Statement of the National Retail Merchants Association, Washington, D.C_ 149 

Statement of Wendell O. Metcalf, International Council for Small Business, 

Washington, D.C 151 

Statement of the Association for Advanced Life Underwriting 152 

CONFERENCE DATE 
November 16, 1978: 

Morning session 1 



SMALL BUSINESS ISSUES AND PRIORITIES— 1978 



THURSDAY, NOVEMBER 16, 1978 

U.S. Senate, 
Select Committee on Small Business, 

Washington, B.C. 

The Senate Small Business Committee staff met at 9:40 a.m., 
pursuant to notice, in room 6226, Dirksen Senate Office Building, 
William B. Cherkasky, executive director, presiding. 

Mr. Cherkasky. I want to thank you all for coming. 

This is our third annual get-together of small business organiza- 
tions. 

Some of you have been through this before. I know that you will 
find, those of you who have been here before, that some of this is 
repetitive. The staff of the Small Business Committee feels however 
that this is a useful session for us. 

We have to prepare an agenda for the next 2 years. We are always 
asked by the Senators on our committee to find out what is on your 
minds, what is uppermost, and what should be on the agenda for them 
to consider in our organizational meeting in January. 

We deeply appreciate your taking the time to be here. 

I have a statement from Senator Nelson. With my unerring instinct 
for timing, I picked the one day in the fall season when the Wiscon- 
sin IB AW organization has a meeting. 

Senator Nelson is speaking to them this noon in Fond du Lac, and 
is not here for that reason. 

I think another half dozen associations told me this is the one date in 
the entire fall season they couldn't be present. So I have a great knack 
for picking the wrong date. 

Ordinarily, we do this in January, but I prefer to get started early 
this time, because we have had a great turnover in Congress. You may 
know that our committee lost three members through defeat in the 
elections and one through retirement. 

The format today is a simple one. We sent out letters to all of you 
and asked for responses in the form of written comments. Where pos- 
sible, we are asking certain groups to lead the discussion in some 12 or 
13 areas. These can be prepared papers. 

They will be brief. We will run through them and then open up the 
meeting for further discussion and comments. 

In that way, I hope to keep the meeting structured more so than 
in previous years so that we can be out of here by 12 o'clock or 12 :15. 

I do want to read one quick statement from Senator Nelson for 
the record. 

(1) 



He says : 

At the beginning of the past Congress we began to invite active small 
business organisations to meet with us and to make suggestions for the 
committee's agenda. 

At the first meeting, nearly .°»0 associations were represented. The (community 
has grown rapidly. Today, about 65 organizations directly representing over 
3 million small and independent businesses are present. These meetings are 
increasingly Important to the work of the committee and the Senate. 

This is reflected In Betting the date well in advance of the forthcoming session. 
This will enable us to work on developing, refining and documenting your sug- 
gestion so that they will be of maximum benefit when the committee meets to 
formulate its agenda for early 1979. 

Much excellent source materials has come to light in past meetings and has 
been circulated through the record of these proceedings. 

By the way, these records will be circulated again. There will be a 
number of printed copies for each of you. 
Again, Senator Nelson says : 

Tour specialized analyses of various industry and national problems have 
been shared with us and other organization^. Your recommendations have led to 
public hearings, and in some instances to remedial bills and legislation or 
administrative action. 

For example, in the first meeting of February 7, 1977, the Venture Capital 
Association presented a .study of the contribution of small, innovative firms 
and their problems in raising capital. 

On February 8, 1978, the committee commenced hearings on capital formation, 
which focused national attention on the effect of the tax laws on the inability to 
raise venture capital. As a result, we were able to gain enactment in the Revenue 
Act of 1978, of a reduction in the maximum capital gains tax from 49 percent 
to 28 percent. 

We appreciate your efforts. Your recommendations also will be close- 
ly reviewed and will be of assistance in charting our course for the 
next 2 years. 

[The prepared statement of Senator Nelson follows :] 

Statement of Hon. Gaylord Nelson, a U.S. Senator From the State of 
Wisconsin, and Chairman, Senate Small Business Committee 

At the beginning of the past Congress, we began to invite active small business 
organizations to meet with us and make suggestions for the Committee's agenda. 

At the first meeting, nearly 30 associations were represented. The community 
has grown rapidly. Today, about 65 organizations directly representing over 3 
million small and independent businesses are present. 

These meetings are increasingly important to the work of the Committee 
and the Senate. 

This is reflected in setting the date well in advance of the forthcoming ses- 
sion. This will enable us to work on developing, refining, and documenting your 
suggestions so they will be of maximum benefit when the Committee meets to 
formulate its agenda early in 1979. 

Much excellent source material has come to light in past meetings and has 
been circulated through the record of these proceedings. Your specialized analyses 
of various industry and national problems have been shared with us and with the 
other organizations. Your recommendations have led to public hearings, and in 
some instances to remedial bills and legislation or Administrative action. 

For example, in the first meeting on February 7, 1977, the Venture Capital 
Assoication presented a study of the contributions of small, innovative firms 
and their problems in raising capital. On February 8, 1978, the Committee com- 
menced hearings on capital formation, which focused national attention on the 
effect of the tax laws on the inability to raise venture capital. As a result, we 
were able to gain enactment, in The Revenue Act of 1978, of a reduction in 
tho maximum Capital Gains tax from 49 percent to 28 percent. 

We appreciate the time and effort that you have put into preparing your 
recommendations. You may be assured that they will be closely reviewed and 
will be of substantial assistance in charting our course for the next 2 years. 



Mr. Cherkasky. I think that covers that. 

There is now ongoing a series of 57 meetings in preparation for a 
"White House Conference on Small Business in January of 1980. All 
of you should be able to participate in one way or the other in those 
meetings. 

Under the resolution we sent to the White House, anybody who 
wants to go to these regional and State conferences should be entitled 
to go. You will just have to present yourself, whether you get an in- 
vitation or not. If you have been overlooked, go to the one nearest 
your home. 

When it comes to the final conference in Washington, D.C., in 1980, 
that will be a different story. The people chosen to go to that one 
are chosen by election at the State forums and the regional meetings, 
and some by choice through your Congressman and Senators' offices, 
and, in some cases, the choices will be made by the Administrator of 
SB A, Mr. Weaver. 

So, if you have been overlooked as a delegate and you think you 
ought to go because you are, indeed, a spokesman for small business, 
let either Mr. Weaver know, or myself, and we will be glad to help 
you. The idea is not to restrict people from going, but to include as 
many as possible. 

I would guess the meetings in Washington in 1980 will encompass 
2,500 or 3,000 people, so there should be plenty of room for most all 
people. 

T have not introduced the staff. I want to apologize, because not 
all the staff is here today. If you have been reading the papers in the 
last week you will know that SBA has opened up a number of leaks 
in the dike and we have had to put three of our fingers in New York 
City on the 8(a) program. 

Are there any questions at this point, or comments? 

All right, I -would like to start off the discussion this morning with 
the most important problem facing small business in the entire coun- 
try nrsd that is the matter of inflation. 

We have asked the National Association of Wholesaler-Distributors 
to make the presentation on behalf of that particular point. 

Will you identify yourself ? 

STATEMENT OF GEOEGE A. SEEDS, FIRST VICE PRESIDENT, 
NATIONAL ASSOCIATION OF WHOLESALER-DISTRIBUTORS 

- Mr. Seeds. I am George Seeds, first vice president of the National 
Association of Wholesale-Distributors. I have been asked to represent 
our association this morning. 

I would like, first of all, to offer for the record, a document setting 
forth our recommended priorities for the coming year. 

[The prepared statement of Mr. Seeds follows :] 

Priorities for the Senate Select Committee on Small Business, Presented 

by George A. Seeds 

i. introduction 

Since the February 7, 1978, meeting of the Senate Small Business Committee 
staff with representatives of various small business organizations, many long- 
sought goals of the small business community have been realized. 



NAW welcomes the opportunity to not only make recommendations for the 
committee's consideration as to goals, priorities and objectives in the 90th 
Congress, but to also recognize recently enacted legislation which will benefit 
small business. 

The Revenue Act of 1978 is the most significant capital formation legislation 
enacted by Congress in many years. It represents a recognition by Congress that 
inilatiou and unemployment can be most effectively dealt with through changes 
in tax laws and a strong incentive-oriented private sector. Without the diligent 
involvement and hard work on the part of the Senate Committee on Small Busi- 
ness and its staff, the provisions addressing small business needs would not have 
been as significant. 

The Act contains a new graduated corporate tax schedule with a maximum 
rate of 40 percent on earnings over $100,000 ; a permanent 10 percent investment 
tax credit extended to cover rehabilitation of wholesaler-distributor and other 
commercial and industrial structures-; and, a reduction in the maximum corporate 
capital gains tax rate to 28 percent and in the individal rate to 25 percent. Also, 
the three-year delay of the effective date of the carryover provision relating to 
inherited property of the Tax Reduction Act of 1976 enhances the perpetuation 
of family-owned small businesses. 

The Senate Small Business Committee is to be commended for the inclusion 
of the provision which extends the carryback period to ten years for product 
liability losses in the Revenue Act of 1978. Acceptance of this provision by the 
Congress is a clear indication of the recognition of the severity of the product 
liability problem. 

Further, credit must be given to the committee for laying the groundwork for 
the President's Executive Order establishing a White House Conference on Small 
Business. The conference provides a platform for the nation's small businesses 
to make recommendations to the federal government for changes in public policies 
which seriously impede their economic progress. 

IT. ISSUES OF MAJOR CONCERN TO THE WHOLESALE DISTRIBUTION INDUSTRY 

A. Inflation 

The principal cause of the high inflation which has plagued our economy over 
the last decade has been massive, unabated federal deficit spending. Rapidly 
rising price levels and inflationary wage demands have been a response to, not the 
prime cause of, inflation. Businesses and workers have been attempting to keep 
themselves whole against the effects of inflation. If the Administration and/or 
Congress fail to make the hard choices necessary and do not move to balance 
the federal budget, inflation will continue to accelerate into 1979, and public cries 
for action could result in Congress and the Administration surrendering to 
demands for mandatory wage, price and profit controls. 

B. Capital formation 

The capital formation deficiency is among our most urgent economic problems 
largely eontributable to existing tax policy. Failure to resolve this problem will 
have profound implications for our industry and the national economy. Further, 
despite the recognition and awareness on the part of the federal government as to 
the preservation of a viable small business community in our nation, nothing can 
stop smaller businesses from dying a gradual death unless reform measures are 
enacted to ease the impact of inflation on small businesses. 

C. Product liability 

Product liability litigation continues to increase and wholesaler-distributors 
are not immune under the doctrine of strict liability in tort. Insurance premium 
r.itos are risintr, but are extremely variable. An ever-increasing number of whole- 
saler-distributors have difficulty obtaining renewals of their policies, and when 
cancelled, find it almost impossible to obtain coverage from any other source. 
The inevitable result of this situation is that an increasing number of wholesaler- 
distributors have been forced to go "bare" — with no coverage at all. The problem 
continues to be a major concern of most businesses and will continue to be more 
serious as time goes on, unless a remedy is provided soon. 

D. Federal regulation and the paperwork burden 

Federal regulations continue to be a burden for most wholesaler-distributors 
and the majority of smaller businesses. It is estimated that federal regulation 
of businesses in 1979 will cost at least $1?0 billion. Small businesses oerrainlv pav 
a substantial part of this amount. The Commission on Federal Paperwork in its 



study of the impact of government regulations on small business estimated that 
small business bears at least 60 percent of the paperwork costs imposed by gov- 
ernment on all types of businesses. In many instances, small businesses do not 
have the time nor expertise to comply with federal regulations and, therefore, must 
hire additional outside help to assist them. A recent NAW survey revealed that 
the average wholesaler-distributor spends almost $5,700 a year complying with 
federally mandated paperwork, and expends more than 98.4 days per year filling 
out federal forms. 

HI. RECOMMENDATIONS FOB SMALL BUSINESS PBIORITIES IN THE 96TH CONGRESS 

A. Measures to combat inflation 

The committee should undertake a study which would indicate the specific 
effects of inflation on small business with a view towards generating recommenda- 
tions to Congress for legislative measures to offset the debilatating effects of 
inflation on small business. 

XAW is currently undertaking such a study examining the effects of inflation 
on our industry and will make the results of the study available to the committee 
upon its completion. 

B. Capital formation tax incentives 

We strongly urge that the committee continue its diligent efforts to seek addi- 
tional small business tax relief to stimulate economic growth through increased 
capital formation and retention to supply the needed funds for investment, busi- 
ness expansion, and increased employment opportunities. 

Further, we urge the committee to seek more adequate and up-to-date deprecia- 
tion allowances and make appropriate recommendations. Senator Nelson sought 
provisions for improvement in depreciation methods for inclusion in the Revenue 
Act of 1978. 

C. Product liability relief 

The committee should strengthen its efforts to seek a solution which would 
secure restoration of equity and common sense to our nation's product liability 
system. The best interests of all our citizens lie in a product liability system in 
which liability is borne by the parties giving rise to such liabilities. Wholesaler- 
distributors and others should not be held liable if they are not at fault. 

D. Easing of regulations and paperwork 

The committee should develop recommendations to be made to the Congress 
which would require the federal regulatory agencies to consider the special 
operating circumstances of small businesses when promulgating regulations and 
continue its efforts to seek adoption of proposals recommended by the Com- 
mission on Federal Paperwork to alleviate the regulatory and paperwork burden 
on small business. 

We firmly believe that the above recommendations will provide solutions to 
the aforementioned problems and we urge their inclusion among the Senate 
Select Committee on Small Business' priorities for the 96th Congress. 

Structure and Economic Significance of the National Association of 
Wholesaler-Distributobs and the Wholesale Distbibution Industby 

The National Association of Wholesaler-Distributors is a federation of 108 na- 
tional wholesaler-distributor associations, which have an aggregate membership 
of approximately 40,000 wholesale-distributors, with 125,000 places of business. 
The members of our constituent associations are responsible for 60 percent of 
the over $700 billion of merchandise which will flow through wholesale channels 
this year. They employ a comparable percentage, or 2.5 million, of the 4 million 
Americans who work in wholesale trade. Thus, although the individual firms 
which our organization represents are small-to-medium size businesses individ- 
ually, their collective economic importance is most signficant. 

The wholesale distribution industry, in contrast to the manufacturing sector 
of the economy, continues to be dominated by small-to-medium size closely-held, 
family-owned businesses. Of the 202,000 merchant wholesaler-distributor corpora- 
tions filing tax returns in 1973. 99 percent had assets of less than $10 million. 
These smaller firms accounted for about 65 percent of the industry's sales vol- 
ume. In contrast, in the manufacturing sector, approximately 2 percent of the 
firms controlled about 88 percent of the assets and accounted for approximately 
80 percent of sales. 



6 

The wholesale distribution industry provides year-round employment for 3.5 
million individuals. In l!»T7, average hourly earnings ($6.78) in wholesale trade 
tded those for all private industry ($5.14), while average weekly earnings 
-) were (15 percent) ahove those in private industry i$185). In short, the 
wholesale distribution industry provides dependable, well-paying jobs through- 
out the U.S. economy. 

Industry sales In i!>77 totalled $532 billion ami are expected to reach approx- 
imately $665 billion in constant dollars in 1982, according to Commerce Depart- 
ment estii. 

Merchant wholesaler-distributors perform an essential economic function. They 
make goods and commodities of every description available at the place of need, 
at the time of need. Wholesaler-distributors purchase goods from producers, in- 
ventory these goods, break bulk, sell, deliver, and extend credit to retailers and 

Wholesaler-distributors are essential to the efficient satisfaction of consumer 
and business needs. Farther, by the -market coverage which they offer smaller 
suppliers and the support which they provide to their customers, wholesaler* 
distributors preserve and enhance competition, the critical safeguard of otu 
'em. According to a recent XAW survey, the typical wholesale 
tribntor establishes the market connection between 133 manufacturers and 533 
business customers. Many of these manufacturers are themselves small business- 
who must rely on wholesaler-distributors to establish, maintain, and nurture 
markets for their products. The majority of customers are small businessmen 
also, who look to the merchant wholesaler-distributor to provide merchandise 
availability, credit, and other critical services. 

NATIONAL WHOLESALE DISTRIBUTION ASSOCIATIONS AFFILIATED WITH NAW 

onditioning & Refrigeration Wholesalers. 
American Machine Tool Distributors' Association. 
American Research Merchandising Institute. 
American Supply Association. 
American Surgical Trade Association. 
American Traffic Services Association. 
Appliance Parts Distributors Association, Inc. 
Associated Equipment Distributors. 
Association of Footwear Distributors. 

elation of steel Distributors. 
Automotive Service Industry Association. 
Aviation Distributors & Manufacturers Association. 
Bearing Specialists Association. 
Beauty & Barber Supply Institute, Inc. 
Bicycle Wholesale Distributors Assn., Inc. 
Biscuit & Cracker Distributors Association. 
Ceramics Distributors of America. 
Copper & Brass Servicenter Association, Inc. 
Council for Periodical Distributors Associations. 

Council of Wholesale-Distributors, American Institute of Kitchen Dealers. 
Distributors Council, Inc. 
Door & Hardware Institute. 
Drug Wholesalers Association. 
Electrical-Electronics Materials Distributors Assn. 
Ethical Veterinary Distributors Association, Inc. 
Explosive Distributors Association, Inc. 
Farm Equipment Wholesalers Association. 
Fireplace Institute. 
Flat Glass Marketing Association. 
Fluid Power Distributors Association. Inc. 
Food Industries Suppliers Association. 
Foodservice Equipment Distributors Association. 
Foodservice Organization of Distributors. 
General Merchandise Distributors Council. 
Hobby Industry Association of America. Inc. 
International Sanitary Supply Association. 
The Irrigation Association. 
Laundry & Cleaners Allied Trades Association. 
Fawn & Garden Distributors Association. 



Machinery Dealers National Association. 

Mass Merchandising Distributors Association. 

Material Handling Equipment Distributors Assn. 

Monument Builders of North America — Wholesale Div. 

Motorcycle Trades Association. 

Music Distributors Association. 

National-American Wholesale Grocers' Association. 

National Appliance Parts Suppliers Association. 

National Association of Aluminum Distributors. 

National Association of Brick Distributors. 

National Association of Chemical Distributors. 

National Association of Container Distributors. 

National Association of Decorative Fabric Distrs. 

National Association of Electrical Distributors. 

National Association of Fire Equipment Distrs. 

National Association of Floor Covering Distributors. 

National Association of Marine Services, Inc. 

National Association of Plastics Distributors. 

National Association of Sporting Goods Wholesalers. 

National Association of Textile & Apparel Whirs. 

National Association of Writing Instrument Distrs. 

National Beer Wholesalers Association. 

National Business Forms Association. 

National Building Material Distributors x\ssociation. 

National Candy Wholesalers Association. 

National Ceramic Association, Inc. 

National Commercial Refrigeration Sales Association. 

National Electronic Distributors Association. 

National Fastener Distributors Association. 

National Food Distributors Association. 

National Frozen Food Association, Inc. 

National Independent Bank Equip. Suppliers Assn. 

National Industrial Glove Distributors Association. 

National Locksmiths' Suppliers Association. 

National Marine Distributors Association. 

National Paint Distributors. Inc. 

National Paper Trade Association, Inc. 

National Sash & Door Jobbers Association. 

National School Supply & Equipment Association. 

National & Southern Industrial Distributors Assns. 

National Swimming Pool Institute. 

National Welding Supply Association. 

National Wheel & Rim Association. 

National Wholesale Druggists' Association. 

National Wholesale Furniture Association. 

National Wholesale Hardware Association. 

National Wholesale Jewelers' Association. 

Northamerican Heating & Airconditioning Whirs. 

North American Wholesale Lumber Association, Inc. 

Optical Laboratories Association. 

Pet Industry Distributors Association. 

Power Transmission Distributors Association. 

Safety Equipment Distributors Association, Inc. 

Scaffold Industry Association. 

Service Merchandisers of America. 

Shoe Service Institute of America. 

Specialty Tools & Fasteners Distributors Assn. 

Steel Service Center Institute. 

Toiletry Merchandisers Association, Inc. 

Toy Wholesalers' Association of America. 

Truck Equipment & Body Distributors Assn., Inc. 

United Pesticide Formulators & Distributors Assn. 

Wallcovering Wholesalers Association. 

Warehouse Distributors Association for Leisure & Mobile Products. 

Watch Materials & Jewelry Distributors Association. 

Wholesale Florists & Florist Suppliers of America. 

Wholesale Stationers' Association. 

Wine & Spirits Wholesalers of America. Inc. 

Woodworking Machinery Distributors Association. 



8 

Mr. Seeds. I certainly welcome this opporuniy to be with you to offer 
our recommendations on what our members believe the Small Business 
Committee's priorities for the next 2 years should be. 

Let mo start by commending both the committee and its staff for 
the leadership role which they have taken in encouraging passage of 
legislation of vital import to wholesaler-distributors and others in the 
small business community. Very significant and outstanding progress 
was made toward meeting small businesses' problems during the last 
Congress as a result of your efforts, and we are most appreciative. 

We would like to also call attention to the fact that the idea for a 
White House Conference on Small Business originated in the Senate 
Small Business Committee. This has been forgotten by some, but not, 
1 assure you, by our members who remember your efforts in this regard 
as but another illustration of the committee's commitment to a strong 
small business sector. 

Inflation is the most pressing problem facing our industry today. We 
have commissioned a study by the Graduate School of Business at the 
University of Michigan on the effects inflation has on the wholesaler- 
distributor. We encourage this committee to undertake a study of the 
effects from the standpoint of inflation on all small businesses and the 
public policy initiatives necessary to offset these effects. No other issue 
is so important, yet less understood. Inflation poses special, serious 
problems for small business. The Small Business Committee can help 
identify these unique effects and what public policy initiatives should 
be undertaken in the years ahead. 

Thank you for an opportunity to make this statement. 

Mr. Ciierkasky. You wouldn't care to summarize some of the points 
you make in your formal submission, would you ? 

Mr. Seeds. Only to stress that we think that the proposed study of 
inflation is very important. It would provide a factual basis on which 
the Congress could act in the area of capital formation and other im- 
portant areas. 

Mr. Ciierkasky. All right. We will come back to your proposed 
study. We will run through the subject and come back to the general 
subjects for a discussion in an hour or an hour and a half. 

On the question of regulation as it affects small business, a repre- 
sentative of Home Builders is going to make a statement. 

Is that represent ath T e here? 

[No response.] 

Mr. Ciierkasky. Well, I guess we will skip that and come back to 
it later. 

Is Mr. Pinaro here of the Ketail Bakers ? 

A Voice. He was unable to be here today. 

Mr. Cherkasky. He was going to make a statement on minimum 
wage and social security. 

A Voice. I wasn't prepared to make a statement. 

I am sorry. 

Mr. Ciierkasky. I am sorry I called on you. I will talk to my chief 
counsel in a minute or 2. 

We are to item 6, and we have two strikes. 

What about paperwork? 

Va\ Richard! Ed, you are here. 

Thank you. 



9 

STATEMENT OF EDWARD H. RICHARD, CHAIRMAN, CITIZENS 
COMMITTEE ON PAPERWORK REDUCTION 

Mr. Richard. Good morning. 

I am Ed Richard and I am chairman of the Citizens Committee on 
Paperwork Reduction. We have a formal statement which we have 
prepared and I would appreciate it if you would put it in the record. 

Do you have copies of it '? 

Mr. Spira. Yes. 

[The prepared statement of Mr. Richard follows : J 

Statement of Edward H. Richard, Citizens Committee on Paperwork 

Reduction 

As most of you know, I have taken the position as chairman of the Citizens 
Committee on Paperwork Reduction, the follow-up group established early this 
Spring to the Commission on Federal Paperwork which Senator Mclntrye co- 
f*li*3 irpd 

We are in the process of reorganizing the Committee and expect to join the 
activist 96th Congress in the development of new initiatives to cut government 
paperwork. , . 

We will have the support of many small business groups who are associated 
with us, as well as big business, labor, educational institutions and many other 
groups— including State and local governments. 

Since the Committee was established, it has worked directly with several 
Senate and House offices to develop new legislation. It has monitored the work 
of the Office of Management and Budget, particularly as the Office has begun to 
follow the recommendations of the Commission. To date, over 150 of the 810 
recommendations have been implemented, but we do not know how well it has 
been done. 

We do know that Federal paperwork is costing private industry between $25 
to $32 billion per year, individuals over $8 billion per year and $350 million to 
the farmer. The Commission on Federal Paperwork's limited investigations 
found that should these 810 recommendations be implemented by the responsible 
departments and agencies, an estimated $10 billion on first year savings could 
be realized. 

That is on a larger scale. Today, I am here to talk about one specific group, 
the individuals engaged in small businesses who now find that they are spending 
more and more time on government demands for information and cutting into 
own work for their respective livelihoods. 

I need not spend this time reiterating the universal dilemmas of the small 
businessman which have been heard so many times over before this very com- 
mittee, but I would like to zero in on a few specifics which can be realized and 
offer direct relief to small businesses. 

Some amount of sensibility and sensitivity must be incorporated into the Fed- 
eral paperwork requirements imposed upon the small businessman. Ideally, the 
Citizens Committee suggests that the following areas of concern be considered by 
this committee. 

- Regulations. — Just the number of pages in the Code of Federal Regulations has 
jumped from 2400 in 1938 to over 65,000 today. The number of regulatory agen- 
cies has doubled in about the same time period. Each time a new regulation is 
promulgated, the small businessperson must determine if it affects the business, 
how it affects the business and then what information must be collected and 
maintained in order to comply. 

How can we stem this explosion? There are several things which can be done. 

When Congress first drafts legislation, legislators need to look down the road 
at what this particular bill might generate in the way of regulations. Regulations 
mean compliance and compliance needs paperwork. 

If Congress made its legislative language concise, it would interrupt the devel- 
opment of conflicting interpretation by agencies that must implement the new 
law. That is a significant step forward. That little phrase, ". . . and additional 
information which may be deemed necessary by the Secretary." often leaves the 
door open for bureaucrats to drain our companies of information. That needs to 
be removed from bills as often as possible. 



10 

Senate Rule 4, requiring paperwork impact statements is another way to cut 
paperwork. Significant statements can provide the Senate, and to the same extent 
the House with a general idea of what additional forms and information requests 
may he required. 

ncies collecting the information should view the request from the. 
<\\ i s of the respondent. Write government regulations and other materials so that 
they can he understood by the people who are required to respond and supply the 
information. 

Consideration by government agencies should be given to several other areas to 
help reduce paperwork. For Instance, is there an alternative source for t his infor- 
mation? Has it been previously collected V Could sampling provide the need i 
information rather than an entire industry classification reporting? 

The government often does not consider how its programs impact on others. 
Information requests may appear sensible in Washington, but are unnecessarily 
costly, confusing and ineffective among the people working with or being served 
by the government. Additional attention needs to be devoted to obtaining public 
comment prior to regulations going into effect. 

Ovi riap and duplication. — These words constitute a major small business com- 
plaint. "We want to comply and we do comply. But it is frustrating to spit out the 
same information to both Federal government agencies and agencies of the 
State only in a different format. OSHA reporting requirements are famous for 
this, as are Federal and State tax forms. For the life of me, I can't see why the 
Federal government and the States can't get together on tax forms — it is pro- 
vided for in the law. The information requested is essentially the same, but we 
have to contend with separate instructions, duplication of effort and so forth. You 
know the answer : Bureaucratic Turf. 

Communications. — Lack of understanding or confusion on a particular form, 
reporting requirement or regulation often results in frustration or "guessing" as 
to what is required and expected by the Government. The Federal government 
should make every attempt to provide a point of contact (telephone number, 
address, or name of an agency ombudsman) for additional clarification or infor- 
mation. This point of contact should be clearly noted with the form or instruc- 
tions and not buried in a myriad of bureaucratic referrals. Banks do, department 
stores do, but not the Federal government that is "here to help !" 

I would like to stress just one form, of the Renegotiation Board, which I under- 
stand may be phased out of existence. It has an RB-1 form which requests costs 
and pricing data on all products of a company selling over one million dollars to 
the Federal government. The form has been criticized by large businesses as well, 
and they certainly have more of a budget to fill it out than do I. Nevertheless, if 
that one million dollar floor was raised to three or five million dollars, the small 
business entrepreneur would have an added enducement to sell more to the 
Government, knowing the paperwork requirements would be minimal. 

These examples are few, and I could go on and on, but I think they show you 
how some little changes can accomplish both savings in time and money to the 
14 million small businessmen and women. 

I'll throw this on the table for you to think about: All agencies have been 
required to submit a 1978 (paperwork) burden reduction goal. I applaud the 
goals of agencies as the Civil Service Commission which set a goal of 11.8 percent : 
the Internal Revenue Service, 5 percent; and the Veterans Administration, 8 
percent. 

What is discouraging is the Environmental Protection Agencys goal of per- 
cent, the Office of Management and Budget striving for a percent reduction and 
finally the Equal Employment Opportunity Commission which simply says their 
figure is "not available." NOT AVAILABLE — EEOC's paperwork is always cited 
as burdensome. That needs oversight. 

The small business community is sincerely interested in cutting down on the 
paperwork burden not only because of the time consumed in handling the work, 
but also because we do not have the sophisticated staff of large companies to com- 
prehend and fill out the forms correctly. We can't do it alone. 

With representation from all over the country, and from many groups and or- 
ganizations including state and local government, we believe that we are not 
facing an insurmountable problem. However, it is going to take some work. 

With sufficient backing and interest, the Citizens Committee stands ready to 
work with this, the leading Committee for small business, to develop the programs. 
The time for action is now. and the activist 96th Congress is going to be our 
workplace. 
Thank you. 



11 

Mr. Richard. The Citizens Committee is a broad-based group repre- 
senting not only small business but big business and labor, elected offi- 
cials and education on the higher level, the secondary level. 

It is the committee that was set up as a recommendation by the 
Federal Paperwork Commission, charged with the responsibility of 
implementing the recommendations of the Paperwork Commission. 
Just this week we issued a statement on the publication by the Office 
of Management and Budget, entitled, ''Paperwork and Red Tape, 
Xew Perspectives, New Directions." We applaud the directions that 
are being taken, but we calculated that if Ave wait for the length of time 
that it is taking to see these recommendations implemented, it will be 
at least 5 years and possibly more before the 810 recommendations are 
put into effect. 

It is not that the agency involved did not participate as the recom- 
mendations were put together. They did. They participated in their 
development, and we would hope that the committee in its program 
this year would put a push behind seeing that the various recommenda- 
tions of the Federal Paperwork Commission are implemented in a 
speedier way. 

Our figures indicate that if these 810 recommendations were imple- 
mented, there would be an estimated $10 billion in first-year savings 
to the various groups involved. 

But I want to talk today about the small business people. We now 
find that we are spending more and more time in supplying informa- 
tion to the Government which leaves us much less time to run our 
businesses. 

I speak as an individual small business perrson who has analyzed 
this, and who finds that my accounting department is spending more 
than half of its time filling out in what we think, in many cases, pre 
unnecessary Government forms. We do not have the time to analyze 
and do the financial planning that we have to do in order to keep 
our company going in these very difficult times. It is becoming a 
very major frustration for us. 

If you look at the number of pages in the Code of Federal Regu- 
lations, you will see the extent of the problem. In 1938, there were 
2,400 pages. Today, there are 65,000 pages in the code alone. 

The number of regulatory agencies has doubled in about the same 
period of time. Each time a new regulation is promulgated, the small 
business person must determine if it affects him, his business, how it 
affects his business and what information must be collected and 
maintained, and whether he is complying. 

We suggest several specifics. When Congress first drafts legisla- 
tion, that the legislators look down the road at what this particular 
bill might generate in the way of regulations. Regulations mean 
compliance, and compliance, unfortunately, always means paperwork. 

When I walked into this room today, I saw a huge truck of paper 
being unloaded down the hall. 

Mr. Cherkasky. That was a transcript of today's meeting. 

Mr. Richard. Yes. I stopped in to see the assistant to Senator 
Bumpers, and I am delighted to hear he would like to be on this 
committee. He suggested one way to outlaw paper is to outlaw copy- 
ing machines. We are not against copiers, but they have proliferated 
this problem. 



12 

There is one little phrase that we think your committee should 
take a look at. It is, "And additional information which may be 
deemed necessary by the Secretary." 

This phrase appears in many pieces of legislation. It appears to 
be very simple, but it produces some of the most awesome require- 
ments that small business people have ever seen. 

We strongly recommend that that phrase be outlawed from future 
bills. 

Senate rule 4 requiring paperwork impact statements is another 
way to cut paperwork. Significant statements can provide the Senate, 
and to the same extent, the House with a general idea of what addi- 
tional forms and information requests may be required. 

Unfortunately, though people, talk about Senate rule 4, and that 
there are impact statements, but they are weak, watered down, and 
not terribly effective as far as the small business segment is concerned. 

Agencies collecting information should view the requests from the 
eyes of the respondent. I think if each person who had to design a 
form was required, himself or herself to fill out that form, the forms 
would be one heck of a lot simpler. 

As an example, just last week, my company received a form from 
the Department of the Treasury. We are a small public company. We 
have one foreign shareholder. As a result of that, we are required 
to fill out a 90-page form because of this one shareholder. 

There are 15 pages of the most impossible directions that I think 
I have ever read. Three people in my company have read them, and 
each one gets more confused when they read the directions. 

Mr. Cherkasky. Which agency is that? 

Mr. Richard. The Department of the Treasury. 

Mr. Cherkasky. Will you send me a copy of that ? 

Mr. I\ re hard. Yes ; I think I will send you the original. 

Mr. Cherkasky. We will fill it out for you. 

Mr. Richard. You are on. 

[Laughter.] 

Mr. Cherkasky. That is no problem. 

Mr. Richard. Consideration by Government agencies should be 
given to several other areas that help produce paperwork. For in- 
stance, is there an alternative source for this information? Would 
sampling provide the needed information rather than an entire in- 
dustry classification reporting ? 

The Government often does not consider how its programs impact 
on others. Information requests may appear sensible in Washington, 
but are unnecessarily costly, confusing, and ineffective among the 
people working or being served by the Government. 

Additional attention needs to be devoted to obtaining public com- 
ment prior to regulations going into effect. 

I would personally like to commend your committee as one of the 
few that recognizes this responsibility and has sought to overcome 
it, but we need more of it, concerning every piece of new paperwork 
that comes out. 

There arc two keywords that we in small business, those of us who 
are specifically concerned about paperwork, are very concerned about 
The words "overlap" and "duplication." 

We want to comply and we do comply, but it is frustrating to spit 
out the same information to both Federal Government agencies and 



13 

agencies of the State, only in a different way. OSHA reporting re- 
quirements are famous for this, as are Federal and State tax forms. 

For the life of me, I cannot see why the Federal Government and 
the States cannot get together on tax forms. 

Communications is a serious problem, lack of understanding or con- 
fusion on a particular form, reporting requirements and regulations, 
which often result in frustration or guessing. We have even been told 
on occasion that it isn't necessary to put in the information that is 
correct as long as you fill in the blanks and send them back. That is 
ridiculous. 

In private industry, banks help their clients, and so forth, but in the 
Federal Government, if you don't understand the form you receive, it 
is a frustrating experience trying to get help from the Federal 
Government. 

There is one form I would like to call to your attention. It is the 
form of the Renegotiation Board, RB-1, which requests cost and 
pricing data on all products of a company selling over $1 million to 
the Federal Government. 

The form has been criticized by large business as well, and they 
certainly have much more of a budget than we do for filling this sort 
of thing out. 

Nevertheless, if you put forth legislation to increase that floor from 
$1 million to $3 million or $4 million, the small business entrepreneur 
would have an added inducement to sell more to the Government know- 
ing the paperwork requirements would be minimal. 

These are just a few examples of problems with paperwork. 

All agencies have been required to submit a 1978 paperwork burden 
reduction. We applaud the Civil Service Commission, which set a goal 
of 12 percent. The IRS set a goal of 5 percent, and, the VA, 8 percent. 

What is discouraging, and what we request that this committee look 
into, is the Environmental Protection Agency's zero percent ; the Office 
of Management and Budget striving for a zero-percent reduction, and, 
finally, the EEOC, which simply says their figure is "not available." 
EEOC's paperwork is always cited by every one of our members in 
surveys as extremely burdensome. That means oversight from this 
committee. 

Mr. Cherkasky. EPA, OMB, and EEOC ? 

Mr. Richard. Yes. 

Mr. Cherkasky. OK. 

Mr. Richard. The small business community is extremely interested 
in reducing the burden of paperwork. Frankly, from the pragmatic 
point of view, we cannot do it alone. Our committee, which is the focal 
point of the burden of paperwork, is anxious and willing to be of 
whatever assistance we can. 

Thank you for inviting us. 

Mr. Cherkasky. We many times hear about the amount of paper- 
work that is imposed on businesses by the Federal Government and 
the State governments and the counties and locals and all the rest. But 
what we really need most times is absolute documentation of a par- 
ticular form which is onerous, such as the form you are talking 
about that is 90 pages long. Those are the things we would like to see 
and examine them and ask the agency, "Why do you need all this 
information?" 

40-287—79 2 



14 

Tr is hard bo tell the . '( Jut your paperwork LO ot 12 percent ." 

Luse that loa\ i to their own means. They have to be cha 

\ > direction. We need direction . m to a particular 

• of paper. 

For example, a year ago, we had to go to I of the Senate to 

reduce one paper, the Department of i\- bor form on hiring stud 
for less than 20 hours a week. The form was seven pages loi 

s of instructions. We got the Labor Department to do a one- , 
card form, with a half-page directions. 

It is that sort of thing I to have. Even this one will do it. 

Mr. Richard. In the new congressional year, we will be working on 
a list of forms most often complained about by the people we are in 
touch with. We will try to give von specific answers why 
difficult 

In this limited statement I can make now. Ave talk more about the 
problem, but we are anxious to help yon develop some of the solutions 
coming with the specifics that are necessary. 

Sometimes when we reach out for information, when we seek ideas 
from our constituents, we get gross generalizations; we are trying to 
boil them down into specifics. We had hoped to have some of this for 
you in the early part of the session. 

Mr. Cherkasky. I would appreciate that. That goes for everybody 
else here. If you have a particular piece of paper, or a Government 
form of some type that you think is onerous, or if you think the infor- 
mation is retrievable somewhere else, let us know what it is. 

Mr. Richard. The Citizens Committee would like to work with other 
groups, so if they have forms that their members are complaining 
about, please let us know. 

Thank you. 

Mr. Cherkasky. Thanks, Ed. 

Don, you are here, aren't you? 

Don DeBolt, you are going to say something on taxes, as I under- 
stand it? 

STATEMENT OF DONALD DeBOLT 

Mr. DeBolt. The whole tax structure, as it applies to small busi- 
ness, offers a great opportunity in the next Congress and this com- 
mittee to address itself to directly. 

I think we saw the tip of the iceberg in what could be opportunity 
areas as we show how the Congress responded to the graduated cor- 
porate income tax, recognizing the special capital formation needs 
of small business. 

We would encourage the committee to take this track and develop 
it further, seizing initiatives that will help the small business com- 
munities, through the tax structure, to achieve some of the goals of 
capital formation that are so critical to its survival. 

In tho area of small business and capital formation, T would like 
to address this and point out an area of opportunity that I don't think 
has been addressed by the committee or by any agency thinking at 
this particular structure. 

Capital formation has primarily addressed itself to the availability 
of capital in the existing stream of institutional capital areas, such as 
the banking system, such as the Small Business Administration di- 



15 

rectorate of guaranteed loans and through the SBIC approach, which 
have been successful as far as venture capital. 

However, there is a way to achieve some of the same objectives 
that have been attempted in these areas through developing an innova- 
tive approach to capital formation that can be used to assure the con- 
tinued survival of small businesses now that are very successful in 
all areas of our economic community. 

What I am really talking about is the small business that is too 
small to be bought by a large company where existing ownership and 
management has reached a point in their career where they no longer 
are able to carry on the business, because of retirement, because of 
estate planning needs or other critical factors that affect their own 
decisionmaking process. 

WKat we would like to see the committee take a good look at is 
where there could be some vehicle created for assisting in the buyout 
of existing small businesses by perhaps employees of those small busi- 
s or a third party interest which has an ability to manage that 
business successfully and assure the continuity of the employees em- 
ployed by this business, and also the potential growth of that business. 

We can visualize a system that would guarantee and protect the 
seller of the business if he wishes to carry the contract payout for the 
purchase of that business, and let me describe a situation that may 
be very simple and easy to understand that elucidates the problem. 

We have a member of the association that has operated his business 
for 27 years. He has been very successful in his community. It is a 
community that is too small to be attractive to a shopping center mall. 
He has a great downtown location, he has owned a building for 15 
years and lias the mortgage almost paid off. He has $250,000 of assets 
which he personally has created over the years. He is about 63 years 
old now. His children are gone, they became doctors or lawyers or 
employees of the Senate staff committees, or whatever you might want 
to describe them 

Mr. Cherkasky. You took away Walter's speech. 

[Laughter.] 

Mr. DeBolt. He has no family member to take on the business. He 
has an employee who knows the business, and has been with him 12 
years. He can control the business and the employees, but the guy 
has been so underpaid over these years that he hasn't been able to 
build up a capital base of his own. So he has no capital with which to 
buy the business, which has a value of $250,000. 

Now, our member who started this business, who created it, and 
trained this young man knows that he is perfectly capable of running 
this business. He is also aware of the fact that the young man doesn't 
have the capital and the wherewithal to purchase the business. 

He would be more happy to sell that business to this young man, 
a $250,000 value, with a payout, say, over the next 15 years, which 
would return to the seller of the business maybe between $23,000 and 
$27,000 a year, which will enable him to buy the condominium in 
Phoenix, and he and his wife can golf and relax and hopefully en- 
joy some of the fruits of the efforts they have created over these years. 
But his whole retirement is riding on the equity he has built up in 
the business, and to take the risk of accepting a long-term contract, 
without backup with respect to whether that contract will be paid off 
over a period of time, is a problem for him. 



16 

He is reluctant to take that route. So lie has to decide, "I have to get 
money out of this business, and the only way is to have a going-out-of- 
business sale." 

He closes down the business. He has most of his assets out, and sold 
the building, and another small business has gone by the board. Several 
employees are going to be unemployed as a result of this. 

A young man who has the potential of running this business for the 
next 30 years is denied the opportunity because he doesn't have the 
capital potential to carry it on. 

So we would like the committee to address itself to whether there 
could be a guarantee program developed as a vehicle. It doesn't have to 
bo a 90-percent guarantee. It could be a 60- to 70-percent guarantee, 
where the seller would take some exposure, and the local bank, too, and 
the young man can probably put a second mortgage on his house to 
raise some of the money, and you have a very smooth transition of a 
small business to an entrepeneur. 

In summary, we think the next Congress offers the climate for small 
business to perhaps gain some of the most important opportunities to 
survive that it has ever confronted in its entire history. 

We would like to urge this committee as well as the people who are 
gathered here today to start thinking in terms of initiatives for small 
business. 

Yes ; we have the problems with paperwork. Yes ; we have the prob- 
lems with inflation, and with overregulation, but the opportunity ex- 
ists now as never before to look ahead for the next .50 years and see if 
we can put on the books in the way of legislative initiative that will 
give the opportunities to small businessmen that have been so impor- 
tant in creating the fabric and fiber of this country, and led us to be one 
of the superpowers of the world we inhabit. 

We commend the committee for taking the time to hear the views of 
the people assembled here today. 

Mr. Cherkaskt. Thanks, Don, on that point. 

We discussed this before, and I discussed it with Senator Xelson, and 
he is very interested in the problem, and we will have a response to you 
by a member of the staff a little later on that particular point. 

Walter, am I correct that you will be speaking on capital formation 
also? 

STATEMENT OF WALTER B. STULTS, EXECUTIVE VICE PRESIDENT, 
NATIONAL ASSOCIATION OF SMALL BUSINESS INVESTMENT 
COMPANIES 

Mr. Stults. I will come in from the bullpen. 

You asked Don DeBolt to speak about taxes; he talked about capital 
formation. You asked me to talk about capital formation, so I will talk 
about taxes. 

Mr. Cherkaskt. Good. 

Mr. Stilts. Last year, as Don mentioned, the tax bill just passed and 
signed marks a significant step forward for the small business commu- 
nity in several area-. 

A couple of other places you were not successful, however, and we 
would hope the committee will continue its long-term efforts in the tax 
field, that were begun, incidentally, back in 1951, when the committee 
was 6 months oM and held a series of hearings around the country on 
taxes, and has this past year been most successful. 



17 

Now about capital formation and continuity of small business : At 
probably no revenue loss, should you keep fighting for a deferral of 
capital gains, where the securities are issued by a small business and 
the proceeds are reinvested in another small business. 

This is something that is part of your tax package, a part of the 
COSIBA tax package. I think probably the time is ripe there. Don 
told one stor}', and others here in this audience can tell stories of 
successful small businesses whose owners sold out to big business be- 
cause that was the only place they could get a tax-free exchange, 
allowing them to time the tax consequences of that sale. 

I think the time must be right to go ahead and push for that. 

The second point is that we would hope the committee would be 
able to convince the Finance Committee and the Ways and Means 
Committee to authorize once again small businesses to issue and grant 
qualified stock options to attract competent management, a problem 
that small business faces. 

It camiot pay sufficient wages and salaries to induce a person to 
leave a large corporation and become executive vice president of the 
small firm. 

Third, the Nelson proposal on 3-year amortization was great and the 
Senate passed it by more than a 2-to-l vote. It was too bad that the 
Conference Committee washed it out. We certainly hope you will push 
for it again. 

Finally, in the tax area, and all of this relates to the capital forma- 
tion, we seek the reinstatement of general jobs tax credit. We recognize 
that we are in a period where inflation is the No. 1 problem — not un- 
employment — and I believe that if the Carter anti-inflation program 
takes hold, we will see layoffs around the economy and probably in the 
12 months coming up, we will once again have a hue and cry, "Why 
doesn't somebody hire some of the unemployed?" 

We all know it is small business that hires them. 

Specifically in capital formation, your committee and the Senate 
approved title IV of 11445, which was vetoed by the President, We felt 
that title IV represented a good step toward increasing the avail- 
ability of venture capital for small business. 

Our association believes the equity capital gap exists today as it 
did 20 years ago when this Small Business Investment Act was passed. 

Second, we would hope that you will work as closely with the Securi- 
ties Subcommittee of the Senate Banking Committee during the com- 
ing year as you have in the past with the Senate Finance Committee. 

The Securities Subcommittee has jurisdiction over the securities 
laws, the Investment Act of 1940, and the investment rules which pose 
such tremendous obstacles to new and growing businesses which are 
trying to attract external capital. 

We trust that you will work with Senator Pete Williams and his 
staff and get the sort of cooperation from them that vou have with the 
F i n a nee Committee. 

These are the major points of the statement which I have presented 
to you. 

Thank you, very much. 

Mr. Cherkasky. Thank you. 



IS 

[The prepared statement of Mr. Stults follow.-: :] 

National Association of Small Business [investment Companies, 

Washington, D.C., November 15, 197S. 
Hon. Gaylord Nelson, 

Chairman. mmittee on Small Business, 

T'n i ted States Senate, 
Washington, B.C. 

Deab Mb. Chairman: NASBIC appreciates this opportunity to suggest areas 
of activity for your Committee in I 

In large part, we recommend the continuation and expansion of projects which 
the Committee has already initiated. 

1. TAXES 

The 197S Tax Law marks a significant advance for the small business commu- 
nity and the Committee's long-term efforts in taxes laid the necessary ground 
work for those successes. Congress failed to approve other important amend- 
ments to the Code, however, so we hope the Committee will give a high priority 
to tax legislation incorporating the following proposals : 

a. Deferral of capital gains reinvested in another small business or in an 
SBIC; 

b. Authorization for new and small businesses to grant qualified stock options 
to attract competent management : 

c. Three-year amortization for the first $25,000 of depreciable assets with full 
investment tax credit permitted, as passed by the Senate last month; and 

d. Reinstatement of a general jobs tax credit. 

2. CAPITAL FORMATION 

Here again, your Committee has long been concerned about the shortage of 
venture capital available to new and growing businesses: The Senate ] 
Title IV of H.R. 1144a in response to those needs, but the President refused to 
the omnibus legislation which contained a truncated version of Title IV. 
XASBIC believes the "equity gap" still exists in 197S, twenty years after the 
passage of the Small Business Investment Act and urges your Committee to 
continue its comprehensive search for solutions to this vexing problem. Specific- 
ally, we recommend that you study the negative impact of the Securities Laws, 
the Investment Company Act of 1940, and SEC rules on the ability of smaller 
firms to attract capital from the public. We would hope that you could work in 
harness with the Securities Subcommittee of the Banking Committee on this 
subject, as you have done so effectively with the Finance Committee on tax 
legislation. 

I trust that it goes without saying that the officers and staff of our Associa- 
tion will cooperate in any way that we can with you and your Committee. 
Sincerely, 

Walter B. Stults. 
Exeeutive Vice President. 

Mr. Citf.tckasky. I would like to call on next, Frank Carroll. 

A re you here ? 

This is the Small Business Service "Bureau of Boston, Mass. 

STATEMENT OF FRANK CARROLL, SMALL BUSINESS SERVICE 
BUREAU, BOSTON, MASS. 

Mr: Carroll, Thank you. Bill. Ladies and gentlemen. 

Again T want to compliment the Senate Committee on Smal 1 Busi- 
and its staff for an outstanding iob of accomplishment in 1978. 

Mr. Cherkasky. And 1077. 1070, and 1075. Don't forget. [Laughter.] 

Mr. Carroll. I left some of my documents back in Massachusetts, 
so that I am not fully prepared to givfe a comprehensive report this 
morning, but T do have enough information on hand to, I think, give 
a quick summary to some of the problems that small business in the 



19 

United States is going to be faced with and, in fact, are faced with 
now in 1978, and were faced with and, in fact, are faced with now in 
1978, and were faced with them in 1977, and they certainly will be 
faced with them in 1979. 

That is the affordability and availability of all kinds of insurance 
and, in particular, the health insurance. 

We did a survey in 1977 on measuring the small business community, 
and we think we had 9 selected States, and we sent out close to 100,000 
ballots, surveying the small business community with 10 employees or 
less, and some of the results we got back we found very interesting. 

The States selected were the New England States. New York, Xew 
Jersey, Ohio. Michigan, and some of the Southern States. 

We found that 65 percent of these responders responded to, "How 
would you rate the quality of health care you now receive?'- And 65 
percent of the small business people with 10 or fewer employees rated 
it from good to excellent; 77 percent responded, "Strongly agree or 
disagree," to : "Do you think the Government should control hospital 
finances to try to lower charges ?" 

This is an incredible figure, because bear in mind that you are asking 
the small businessman whether he is in favor of stronger Government 
controls over the cost of health insurance: and 77 percent said yes. 

"Do you think the quality of health care will go down or improve 
if the Government controls it?" And 31 percent said it would go down. 

"If you had to pay a large part of your medical expenses out of 
pocket, do you think you would be less likely to see a doctor or get 
medical care?" 

A total of 59 percent would get medical care as often as they do 
now. while 40 percent would get medical care less than now. 

"Do you think there are enough hospitals and special health care 
facilities?" 

Also, 14 percent said too many, 59 percent said the right number, and 
only 25 percent said no. 

"How would you feel about establishing some form of national 
health insurance?" 

And this we found very interesting, as 44 percent were in favor, 
strongly in favor: 19 percent were in favor: and only 18 percent 
strongly opposed, and 10 percent opposed. 

So the point that I am making that we found here is that, although 
small business people, at least the group that we measured. 10 or 
less, are not necessarily calling for national health. They were calling 
for stronger Government intervention in the health care field. 
- Now, these States were selected — by the way. North Carolina was 
one of them — with the cooperation of Jim Thurber from George 
Washington University, who is an expert pollster. HEW, and our 
own research staff who have been working on health care for 10 
3'ears. 

So our survey found. Xo. 1, the small business community is getting 
hurt very badty in the case of the health insurance premium. 

Second, they do want stronger Government intervention, which is 
contrary to some feelings. Some researchers have found that they don't 
want any Government interference. 

Thev are not necessarily in favor of national health, but again they 
want Government control and, in effect, they want cost control. 



20 

I think that is something that all of us have to look for in 1978. The 
health insurance question is not a dead issue. I don't think Senator 
Kennedy is the only one concerned about it. 

Senator Nelson had hearings, and we testified before the Senator's 
hearings here, and it showed a graphic increase, a large increase in 
percentage, of health insurance; the health insurance in the past 10 
years. 

We see no way but up. We talk about inflation and price controls. 
In 1971. for your information, our documentation shows that the high- 
est cost State in the United States, that would be Massachusetts, for 
the cost of health care. 

Yet. throughout the country, our survey, during the last wage and 
price controls, showed that the'health insurance premiums did level 
off and, indeed, the hospitals and the suppliers did control costs. 

So that, although I am not up here asking for wage and price con- 
trols, I want to point out that cost controls do work in the health care 
industry, and I think you are going to find small business people — 
I know you will find the Small Business Service Bureau — hopefully, 
in the front lines leading the fight for strong cost controls in hospitals. 

I think we have a way to go with the American Hospital Association 
and large hospital groups, but all of us here in this room, whether 
you have 500 employees, or less, look at your increase in premiums over 
the past 10 years and you will find how they have increased dramati- 
cally, and not necessarily have the benefits increased. 

In Massachusetts they have a comprehensive program, and in other 
places, in North Carolina and Georgia, they got very little for the 
money ; but those premiums are going sky high, too. 

In terms of the commercial companies, they only get involved in 
selected areas of group health insurance ; whereas, the Blues are the 
largest supplier of group health insurance in the country; and we feel 
they could do a lot more, also. But this is something that is coming 
up in the House and Senate, in my opinion, and certainly President 
Carter is going to be involved in it again ; and I believe Senator Nelson 
will be involved in it. He is concerned about high costs, as I am sure 
Senator Kennedy is. 

"We are currently working on a research program, interviewing small 
businesses, trying to measure the out-of-pocket dollars they are spend- 
ing on health coverage over the premiums, and trying to measure the 
actual percentage of payroll that the small business person pays. 

Also, our study revealed, by the way, that the largest majority of 
small business do pay a minimum of 50 percent of the premium. 

So, if you were taking a survey, in some States, as we found, for 
example, the employers are paying 10 to 25 percent of the payroll for 
health insurance, and he is going to be happy to pay 5 percent under 
a national program. 

Whereas, if you have an employer who is paying 3 or 4 percent for 
health insurance now, he is not going to be happy. But, on the other 
hand, it is a case of some exemptions they try to make for small busi- 
ness, such as credits. 

I think this program might be appealing to a lot of the small 
business people. 

By the way. just to make it clear, we are not advocating national 
health insurance, but I do want to point out that it is out there, it is a 



21 

problem. A lot of people don't think it is because it is not a very sexy 
issue, but it is a very serious issue. 

We have thousands of contacts from our members. A lot of them 
are research programs and projects that are going on throughout the 
country. . . 

I would urge the committee to keep those factors m mind for 

1979. 

Mr. Cherkasky. Thank you, Frank. 

Joe Calif ano would love those statistics. 

A Voice. I wonder if that was the same polling outfit that did Sena- 
tor Mclntyre's polls. [Laughter.] 

Mr. Cherkasky. I would guess that the Congress and the admini- 
stration this next time around are going to be tippy-toeing around 
major national issues with great caution, because they are not sure pre- 
cisely where the constituency is coming from on matters such as health 
cost containment, hospital cost containment, and national health 
insurance. 

My reading of the new Congress is that it is going to be a difficult 
Congress for the administration to deal with and for it to deal with 
itself. 

Mr. Carroll. We heard testimony the other day, and I was surprised 
at the approach that was taken. There are those who want a complete 
takeover of the health care system. We obviously don't support that. 
But, on the other hand, they are turning around to try to get in the 
backdoor of national health by trying to maintain the private sector 
and also trying to have the premiums such that you have an average, 
maybe 4 or 5 percent. So their program, although Ave think it is way 
out, the fact of the matter is that it is gaining momentum, and, when 
they can go to the Conference of Insurers' Legislators and get some 
support — that is made up primarily of private sector people — and 
then I think we have to take another look at national health insurance 
in terms of what the approach to it is. 

Mr. Cherkasky. Certainly that issue will be looked at very care- 
fully, intensively, and cautiously. 

Thanks, Frank, very much. 

Joe Simone, did you want to speak about small business develop- 
ment centers? 

The name of the group again ? 

Mr. Simone. From the Saratoga Small Business Council. And I 
don't think there is anybody else here from New York State. 

Mr. Cherkasky. New York State is not represented today. They 
collected their welfare checks, I guess. 



'5 -*■ fe' 



STATEMENT OF JOSEPH SIMONE, REPRESENTING THE SARATOGA 
SMALL BUSINESS COUNCIL, THE NEW YORK REGIONAL SMALL 
BUSINESS COUNCIL, AND THE GREATER CAPITAL REGION OF 
SMALL BUSINESS COUNCILS 

Mr. Simone. I also represent the Greater Capital Region of Small 
Business Councils, which represents 10,000 firms, and I have a proposal 
that we would like to offer here. And then I am going over to the SBA 
and am meeting with Richie Reiman, who is on the staff of the White 
House. 



22 

Just a quick comment. 

I am happy to see that the individuals who came up here offer 
suggestions, and their expert \se is a lot better than mine. I am not here 
omplex legislator. My report is very, very simple. 

As a matter of fact, it is 15 or 16 pages, and it outlines something, I 
think, that is simple to understand. 

The proposal that we are offering — you know. President Carter 
vetoed tho SDDC. What we are calling for on behalf of small busi- 
ness is an alternate plan to that. 

Shall [read that? It is 2 or 3 pages. 

Mr. Cherkasky. All right. 

Mr. Simonb. We propose through the Small Business Development 
Center Act that the chamber of commerce and the small business coun- 
cils in the United States — and there are maybe 5,000 of those in the 
Seates — we wanted them funded the money and they would provide ex- 
pertise and ideas through their chambers of commerce, and the Small 
Business Administration, or whatever particular organization is in 
their home State. 

The chambers of commerce, who have a network, would begin the 
program. 

In IT.rv. 11445, Ave are willing to comply with all the regulations 
spelled out in that. 

However, if it can't go through the SBA. we would like to have a 
special program that would allow us to go through all these different 
steps, use our expertise, and the programs, with a budget for less than 
$2 billion. 

With respect to 1982, we figure the estimate for the entire Nation 
would be $50 million. That is a drastic reduction. 

That is the presentation in a very short, very brief form. There are 
about 4 or 5 pages spelled out. and so forth. 

We are asking for that pilot project to take place. 

|"The prepared statement of Mr. Simone follows:] 

Statement of Joseph R. Simone, Director, Saratoga Small Business Council 

"To achieve all that is possible 

We must attempt the impossible 
To 1)0 as much as we can he 

We must dream of being more." 

The Xew Manifest Destiny For the 20th Century 

FORWARD 

We would like to thank you and the committee for allowing us to make this 
!" sentation on behalf of the small businessperson and minority enterprise. 

Wo have been given new hope and confidence, through the recent developments 
that the government has initiated and through your efforts, to propose bills that 
will enable a more progressive and enduring small business climate. These factors 
are slowly freeing the small entrepreneur from economic and regulatory bondage. 
<; >vernment and business, however, cannot totally solve the dilemna and common 
current or problems facing today's business unless we include the interest of the 
public which at all times must be foremost. 

Their concern, welfare and good must be the goal toward which we direct our 
efforts. Those actions which we propose here today and in next Congress, must 
not only free the Small businessperson but also help guide the policy of the people 
whom they serve. 

Ft the Manifest Destiny of Small Business is to allow it to rench its natural 
fulfillment of success and free trade, we must be sure that the people, as well as 
the business world and government, are of concern. 



23 

Let us therefore direct our ideas and suggestions so that what is best for the 
economy and our people becomes best for our cause. 

We believe that the common current of problems that face small businesses in 
our communities are no different than those in other communities in America. 
What our small business person and minority enterprise faces in the way of prob- 
lems and regulatory restraints if faced by every individual. 

Our economic system is a marvelous meld of private enterprise, individual 
initiative and public awareness. This system has demonstrated for over two cen- 
turies that, given half a chance, it can produce near miracles of human and 
economic progress. We are aware however, that the common current of prob- 
ems facing small business can hinder the progress and contributions they make 
to American's society. Small business is the lifeblood, the very fabric that holds 
our free enterprise and competitive market together. Without small business 
the progress of this great nation would not be as successful as it is. It therefore 
becomes vital that small business achieve its economic goals, through the co- 
operation of government agencies, Small Business Councils, and Chambers of 
Commerce. To these ends, a new manifest destiny. We have to realize however, 
that cooperation does not mean the surrendering of individuality. 

We find that government agencies overburden, overtax, and over-regulate in 
such a way that the small business is seriously threatened. A small businessman 
today in Saratoga Springs, in the mid-northern region of New York State, and in 
the Capital Region of New York State is no different than a small businessman in 
any other state. When they start in business, they are in need of five separate 
specialists : a banker, a lawyer, an accountant, an adviser and an insurance agent. 
These needs, along with the heavy demands of complying with governmental regu- 
lations, are a major burden to small business and are almost insurmountable. 
Thomas Murphy, Chairman of the Board of General Motors, stated "Business 
people are usually at their best and function at. their best when they are making 
something or selling something or servicing something and competing with other 
businesses. Business people thrive on competition." Competition and not regula- 
tion makes this country work. Let us plan to secure for small business, fair and 
just competition and a right to sustain and take part. Plans and programs that 
are now tentative and flexible need not mean short sightedness. Spending money, 
developing hundreds of programs, making sure the past is secured, are not the 
answers. We must beyond a doubt, look to the future and revise. Our plans must 
be new, innovative and practical. 

One of the things concerning business people today is misdirected and unneces- 
sary government spending, the harmful and wasteful kind that everyone from 
President Carter on down has denounced. We are faced with a tremendous prob- 
lem. How do we survive in the midst of governmental regulations in a nation beset 
by inflation and multi-national competition? We seem to be winning the war but 
sustaining heavy casualties. 

One of the things we think necessary is the re-assessment of goals and defini- 
tions. Our emphasis, yours and mine, must be on practicality, cost-effectiveness 
and ability to do. We need ideas that can be readily implemented and will really 
work. The process that has begun today is a process of exchanging ideas, ideas 
that may help government understand what are the needs of small business. The 
answer lies in asking leaders and people who have been in the business field, their 
solutions to the issue. The small business person more than anyone, knows first- 
hand the problems of small business. He more than others, knows the surest and 
most long lasting remedies, and is concerned with the preservation of the free 
market. 

Our suggestions are as follows : 

I. We would like to redefine what corporations, associations and partnerships 
are and how they may be used by and in small business. We would like to see 
a redefinition of these entities so that they may be allowed to perform and act 
in the same arena as the sole proprietorship. 

II. We would like to see small corporations and partnerships have access to 
the small claims courts. 

III. Governments should be able to deal more freely and regularly in the sale 
and disposition of government property, with and to small businesses. These 
properties, scattered throughout the nation, should be made available to the 
small business for development. The importance of any suggestion is not only 
to sustain the small businessman, but to give him incentive to stay in the 
business. Each year many small businesses fail. 

IV. We would like to see a lessening of the requirements for small business 
corporations to elect for sub-chapter S in the Internal Revenue code. In our 



24 

recent survey, we found that the highest issue facing our small businesses is 
advertising and marketing. Yet at the other end of the spectrum, it emerged 
as the least understood. Again we would like to see a general review and over- 
haul of corporations that are excluded in so many laws and acts. 

V. Businesses today who are unable to either take time or have the expertise 
to handle delinquent accounts turn to collection agencies. The fees for these 
services can deplete a firm's assets and hinder cash flow. Most charge 30-50'V 
for handling these cases. We feel that a bill should be presented that allows a 
graduated schedule. We have begun through the Small Business Councils, the 
Chambers of Commerce and the Small Business Movement, a coalition of Amer- 
icas' Small Entrepreneurs, This association of ideas, of individuals of suggestions 
and attitudes can greatly help the causes we seek. This unity is our strength, 
their diversification, our vitality, their given right to pursue these ends, our 
creed. 

VI. One of the most pressing problems confronting small business and other 
business is detecting and assimilating complex information about those legis- 
lative issues which impact directly on their survival. Many times the interpreta- 
tion comes by the form of a friend or an associate when it is too late or has 
already caused some discomfort. We would like to see some system established 
whereby the Legislative rules and issues affecting small business can be briefed 
to outline form and forwarded to all small business in a way that they can be 
understood and interpreted. This awareness program could in many ways save 
costs which are continuously being reflected in the costs of items sold. Every- 
time a business has to pay for lawyers, accountants, interpreters and agents, 
the cost of these services are reflected in the overall cost of goods. This in 
turn raises prices and these raises are passed on to the consumer and as we all 
know, very simply, inflation. We are not saying that this will solve inflation but 
if carried out throughout the business community there could very well be a 
reduction in price and wage escalation. 

Simpliciflcation and deregulation where it is necessary is of utmost importance. 

ALTERNATIVE TO THE SMALL BUSINESS DEVELOPMENT CENTER ACT 1977 

We feel that another agency even if within the confines of an established 
administration will not only duplicate efforts but take away from existing bodies 
the authority and continuity they have tried to establish. Your Chambers of 
Commerce are more in touch with the business community than any other group 
functioning. Small Business Councils, development agencies, Economic De- 
velopment Corporations have the experts on their boards and on their staffs. 
We should use these existing organizations to meet the end of specific needs. 

Congress should tell us what they want and let us and the business community 
work toward those ends rather than telling us how to do it. W T ith a President 
trying to curb inflation, we feel that we can offer helpful suggestions for Develop- 
ment Centers and expanding the SBA if you use the existing structures and 
expertise. Within the Chambers and the Councils you have three important fea- 
tures : (1) Established business expertise and continuity, (2) dissemination of 
material and information through a capable administrative staff, (3) Follow-up ; 
probably the most important and crucial point of any campaign or effort. 

Since Congress is aware of the needs of small business and agreed on a 
compromise package for HR 11445, we do not feel it necessary to solicit your 
cooperation on those issues. On October 25th, however the President pocket vetoed 
the bill. We have an alternative and would at this time like to present a proposal 
on behalf of the Saratoga Small Business Council and the Greater Capital Area 
Region Small Business Councils of New York State, a pilot project to take affect 
in this region. 

Pilot Project 

We would like to see charge given to the Small Business Councils and Chambers 
of Commerce to effect a program. We suggest that through these agencies, the 
resources, expertise, qualified administrative staff, promotion and continuity be 
used, alleviating duplication of efforts and need of another bureau. 

We agree that the prior bill HR 11445 put an unneeded burden on the economy 
and the SBA. It would in effect take away the authority in the Chief Counsel for 
Advocacy and put him in a policy and administrative capacity which we do not 
feel was the original purpose. 

Within the framework of our Chambers, over 500 in New York State and 35 
Small Business Councils, and over 5,000 Chambers in the Nation, we are confident 
that we can carry out the work and ideas of Congress, the Small Business Person 



25 

and public interest. It will be our responsibility to arrange programs, set policy 
and directions, survey and monitor results, aid and assist businesses and offer 
counseling and expertise. We are doing these things now. Let us expand them. 
Let the Congress set the goals and we will establish through the businesses, means 
to achieve them. 

This program allows business to work with agencies they are familiar with and 
have identified with over the years. Who knows business better than the associa- 
tions of business. 

The Advantages 

(1) Using an existing service and function, established for the betterment and 
service of business, (2) administrative staff help already doing the job for what 
is needed, (3) A chain of Chamber communication that is 450 to 500 strong in 
New York State and over 5,000 Chambers and 500 Small Business Councils 
throughout the nation (4) Dissemenation and thorough followup on the progress 
and advantages of the program. 

The duration would be for one year on a special program. Each Chamber and 
Small Business Council would work with the existing SB A offices in their area. 
Goals would be established through a survey of the businesses. It would be up 
to the business community and the staff and experts to devise the means in 
which to accomplish these goals in the most feasible and economic way. At the 
conclusion of the pilot project Congress, the President and the Chambers of 
Commerce and Small Business Councils with the assistance of the States and the 
Universities would evaluate the program in light of the results and accomplish- 
ments. Of course the input and critique of the businesses are the most important 
since the public interest is our prime concern. 

The proposed budget under the H.R. 11445 would have been close to 2 billion 
dollars through 1982. We suggest that it can be done more efficiently if we follow 
these guidelines : 

(1) Channel the funds through SBA and their local office in Albany. 

(2) A Board of business people from the Chambers and Councils will advise 
and guide the allocation of funds. 

(3) The Chambers and Small Business Councils will apply for these funds 
specifically for programs and seminars and to implement programs that were 
decided on in part in H.R. 11445. 

(4) The SBA office in Washington and the local office will monitor. The 
Chambers and specifically the S.B. Councils will direct and conduct the activity. 

It is also a fact that the Councils and Chambers have as members ; account- 
ants, lawyers, scientists, economists, budget analysts, counselors and agencies 
that are an integral part of operation and usually either volunteer or donate 
much of their time to improve, assist, guide and direct policy and programs. 

If we go by the guidelines and criteria set up by the Joint Economic Commis- 
sion, then we in this proposal have met the requirements. The requirements as 
stated by the JEC are : 

(1) The subsidy must correct a market deficiency. 

(2) It must be efficient in terms of cost required to obtain the desired effects. 

(3) It must distribute its benefits to low, middle, and high income beneficiaries 
in a pattern that is acceptable to society ; the public interest. 

It is a known fact that despite its disadvantages the U.S. capitalistic system 
has produced more benefits to a greater percentage of the population than any 
other system that has ever been devised. Therefore this proposal is in line with 
this thinking. We call for a continuance of the incentive system which will pro- 
tect the standard of living and at the same time ask the government to desist 
from passing new laws which restrict the free enterprise system. This destroys 
incentive which ultimately impedes production. We are all well aware however, 
of the terrible burden regulatory agencies are on business in this nation. In 1977 
it cost us 100 billion dollars to respond and comply with the government agencies. 
That is $470 for every person living in the United States, 5 percent of the 
gross national product, 25 percent of the federal budget. These costs are passed 
on by business to the consumer. These costs present a potential loss of 200,000 
jobs and if that money was put into productive projects for business it could 
have resulted in 1 million jobs. Freedom and the free enterprise system work 
together. Willard Butcher, President of Chase Manhattan bank stated that taking 
one away paralyzes the other. Our free market system sustains domestic pros- 
perity for our citizens and enables all of us to survive. 

When regulations shift the decision making power from the people to the State 
the well being of all Americans is threatened. How much can we absorb and be 



26 

active in the free system of this nation before we are victims of the very ends 
we have selected to achieve. We agree, that some sound practices must be looked 
at by this next Congress. 

We should have economic Impact statements that ensure that regulators 
amine costs and benefits, regulation by regulation; a new approach to the way 
these agencies are set up. Set up what the Congress is trying to accomplish and 
then set up with the business community mik] the people of this nation a plan to 
accomplish those ends. In all it seems that the potential for business to control 
its own destiny must be responsibility of that business. In thai chore, stn 
and formidability -row and develop: and sains become reality. If we are to 
insure the viable growth and rescue of the small business we must turn the facts 
of life into the facts of society. We need the 96th Congress to reverse the roles 
that have been the deciding factors on our trade and free enterprise system over 
the last thirty years. What once was established to help protect, regulate and 
assess the needs and directions of business is now controlling the market, the 
flow, the innovations and the progress of business. We need your guidan 
bottom line responsibility in giving to the enterprises in this nation a new 
Manifest Destiny for the 20th Century. 

SARATOGA SMALL BUSINESS COUNCIL 

Joseph R. Simone, Director. 

Joseph W. Dalton, Jr., Executive Director, Chamber of Commerce. 

Advisory Committee : 

Zimri Smith. Chairman. 

John Simone, Legal Advisor. 

Frank Laskey. 

Jack Minogue. 

Paul Montore. 

Gail Pastor. 

Larry Presler. 

Bunny Ward. 
r.\-Officio : Edward T. Lawless, Pres., Chairman. 

Affiliated with : New York State Association of Small Business Councils. 
Representing : The Central New York Region Small Business Councils — Albany, 
Troy, Sehenectary, Colonie, Saratoga, Gloversville, Glens Falls. 

Mr. Simoxe. The second thing is, one of the things that New 
York State is looking at was a campaign, a regular advertising cam- 
paign with every department of commerce in the Nation. New York 
State likes the idea. They are going to push for it, and it looks like 
they are going to implement that in New York State. 

AYe will have bumper stickers, buttons, and rallies for the businesses 
in New York State. 

We are going to ask for every commerce department in the Nation 
to follow suit. 

I would like to ask the committee to take that under advisement. 
Hopefully, when I get back next week, we will have more information 
on that. That campaign will go in 1979, and we are very, very posit ive 
and confident as to its effect. 

I have to leave, but I want to thank you. And in that report there 
are some very, very simple regulations, six of them, that we would 
like the committee to look at. 

I am not a legislator. I am from the very small town of Saratoga. 
I am here on the issue that you will accept some of these points here. 

Thank you. 

Mr. Ciierkaskt. Thank you, Joe. 

I hope you keep us posted on that campaign, especially on, "^Ye 
love small business." 

Mr. Simone. I hope we will have the support of eve^body in the 
room when it comes out. 



27 

Mr. Cherkasky. You saw George Meariy's statement on the front 
page of the Washington Post on Monday, in which he said President 
Carter is the most conservative President since Calvin Coolidge. 
He said, "I have no quarrel with the President being a businessman, 
but does he have to be a small businessman V 

So George Meany must be reading our press releases. 

The next speaker will be on chronic liabilit}^ insurance, Lee Brown 
of the Small Manufacturers Association of Pittsburgh. 

STATEMENT OF LEE BROWN, ON BEHALF OF THE SMALLER MANU- 
FACTURERS COUNCIL OF PITTSBURGH 

Mr. Brown. First, I would like to start on a positive note by com- 
mending the committee for a rather substantial year of hard work 
regarding small business and our needs. 

On the basis of the pocket veto of H.R. 11445, I must say to you 
that we have got to redouble our efforts in order to accomplish the 
things we started to accomplish last February when we were with you 
the last time. 

The second thing I would like to say is yesterday the Mellon Bank 
of Pittsburgh announced a special small business loan system that 
will basically allow the banks — and by the way, in conjunction with 
the Pittsburgh National Bank, which will allow them to loan to small 
businesses business loans at 1.25 percent below the prime rate. This 
is a brandnew program just announced yesterday. 

The Smaller Manufacturers Council of Pittsburgh for the last 3 
years has been inviting the chairmen of the boards and presidents of 
these banks to our directors meetings, to try to move them in the area 
of small business. I wanted to share with you that something new is 
starting for small business which is important. 

In the area of small business product liability, this in a statement 
of Paul Hankison. We will be presenting this testimony to you in writ- 
ten form, and I would like to be very short and sweet about it. 

[The prepared statement of Mr. Hankison follows :] 

Product Liability Insurance 

The fact that Product Liability Insurance is a necessity for those in business 
need not be proven, that fact has been established. Rather, the question we 
propose is how long will small business be able to afford the protection of such in- 
surance? If the present rate of premium increases continues, Product Liability 
Insurance rates will put small business "out of business." This is a crisis situa- 
tion and, if allowed to continue, every product a company sells has the potential 
to -destroy the company itself. 

November, 1977, Compressed Air magazine, in an article entitled "Coping 
With the Product Liability Crisis," reported many interesting facts: "Hardest 
hit are companies with sales of less than $75 million. In some instances, their 
premiums have jumped from less than 1 percent of sales to 15 percent and more — 
jeopardizing their entire profit." It further stated, "These escalating product 
liability claims affect customers, as well as manufacturers. Whereas a few may 
benefit, the average consumer is encountering higher prices and, in some cases, 
may find products unavailable." 

The Havir Manufacturing Company, a maker of industrial punch presses in 
Minnesota, had $3 million in sales in 1974. In 1975, the company was forced to 
liquidate because it could no longer afford the cost of Product Liability Insurance 
and the legal costs of claims and suits. 

Court decisions have broadened the circumstances under which a consumer can 
collect damages from a manufacturer or seller of a product. Because of the 



28 

consumer move and public debate on the subject, the public became aware of 
their legal rights. However, large contingency fees are inducing the workers' 
lawyer to encourage suits and seek unreasonably high damages and, with the 
advent of no-fault auto insurance, the trend now indicates that attorneys are 
turning to the potentially more profitable product liability cases. 

The April 24, 197S, issue of the Pittsburgh Post Gazete, ran an article en- 
titled, "A Problem of Insurance." In that article, it stated, "contrary to popular 
belief, the often enormous awards which manufacturers — actually their insur- 
ance companies — are forced to pay out to injured plaintiffs are not punishments 
for proven careless behavior. Carelessness — fault — need not be proved in 
most product liability actions. All that is required is that the defective product 
be 'unreasonably dangerous' and in essentially the same condition as at the 
time of manufacture." Quoting again from Compressed Air, it cited the case 
of a Pennsylvania coal miner who had been crippled on the job. He was awarded 
$500,000 by a jury in Pittsburgh. This award, which came on top of $75,000 in 
Workmen's Compensation benefits, was levied against the coal shuttle car manu- 
facturer, even though other miners testified that the victim was operating the car 
improperly. 

It is not the intent of manufacturers to deny the public protection that Prod- 
uct Liability Insurance offers to them. But, our purpose and aim is to keep the 
public protected to a reasonable degree, thus still allowing manufacturers to 
continue to stay in business and carry Product Liability Insurance at premiums 
it can afford. 

For small companies, the cost of Product Liability Insurance has become a 
critical problem. A few cases are stated as follows: 

Hankison Corp. Canonsburg, Pa., manufacturer of refrigerated air dryers for 
30 years, has felt the crunch of soaring insurance premiums. From 1974 to 1978, 
their insurance rates have increased 670%. Hankison's record of claims is one, 
in 1963. and it was settled for $3,000. 

James Austin Co., Mars, Pa., an old firm established in 1889, manufacturer of 
bleach products, states that, in 1975, the premium on $500,000 worth of product 
liability insurance was in the neighborhood of $15,000. This doubled to $30,000 
in 1976 and this figure again doubled in 1977 to $60,000. During those years, they 
also had a million dollar umbrella policy to support the liability coverage and 
this cost approximately $2,400 per year. This, effective April 1, 1977, was in- 
creased to $19,000 so that they have been liability costs increase from $32,400 to 
$79,000 in the past year and, over the past two years, $94,000! The most their 
carrier ever paid out in total payments was less than $8,000 in any given year. 

CBM Industries & Laurel Stone, Inc., Oakmont, Pa., report their product liabil- 
ity premium, in 1976, was $33,400 and, in 1977, $79,400, an increase of $46,000 in 
a twelve-month period ! Their maximum annual settlement, over the last 20 years 
was $6,800. 

The April 14, 1978. Wall Street Journal reported that, to cut high premium 
costs, more firms and institutions are insuring themselves. However, The Chris- 
tian Science Monitor, May, 1978. states that most small business group will still 
not be able to participate. One official of a national small business organization 
states in this paper, "This is a good approach, considering the alternatives, but 
the problem for many firms is cash flow. Small firms often just don't have the 
funds to set up a reserve." 

What do we suggest that government do to help business cope with the prob- 
lem ? Proposed solutions fall into several categories. 

Lower the statute of limitations.— Many suits involve injuries caused by equip- 
ment built many years ago, over which the original manufacturer has no con- 
trol, yet remains liable. 

mi2ondiict'° n ° f puniHve dama ^ es -~^tended to punish a defendant for gross 
Allow evidence of other sources of recovery to be permissible.— A defendant 
cannot submit evidence showing the injured has already received benefits to cover 
medical costs and wage continuation. Therefore, the majoritv of injured recover 
economic osses twice. Health care continues to rise, thus the cost of doublTpav- 
ments will become more burdensome. ■ * 

Rcyulatc attorneys 1 contingency fees.— Many attornevs presentlv receive 30 to 
fjJZT^ a ^ rdS 1 ma . d ?- Mediral "^Practice reform commonly rebates con- 
tingency fees, thus limiting abuses, and injured parties are still assured of 

^Jttft^^ a £ OPn 22 W ° nld recei ™ ade ^ate compenttion 
dclcnZ M^nT^l^T^ after ? tio » "" modification of the product as a 
aefense.— Many third-party suits are brought against equipment manufacturers 



29 

because the purchaser or user of the equipment had removed safeguards or 
somehow altered the product. - • . 

Elimination of strict liability —Product liability would be imposed only m 
cases where the manufacturer or seller is negligent or has breached a warranty. 

The state-of-the art presently judges products made 50 years ago by current 
standards, not in effect at time of manufacture. 

Self insurance reserves. — Companies should be permitted to set aside tax- 
deductible, income-tax-free reserves to be used solely to pay product liability 
claims and expenses. 

Work place injuries. — Workers' compensation should be the sole remedy for 
damages arising from work-related injuries or deaths. As a legislation, such as a 
minimum federal standard for workers' compensation. 

Any or all of the previously-recommended changes would alleviate the present 
crisis' to some extent. We urge immediate action on this vital issue ! Legislators 
can no longer put off changing some of our present laws that are allowing this 
unfair practice to continue. The crisis hits hard at American productivity, since 
small business constitutes nearly 50% of the gross national product. What does 
America do when its laws have permitted costs, directly or indirectly, to force 
the heart of its economy out of business? 

This urgent problem was summarized very well in Compressed Air's article by 
Richard J. Finegan of Liberty Mutual Insurance Company. He said, "Product 
liability is not just an insurance problem. Control will require the coordinated 
and combined efforts of the insurance industry, manufacturers, retailers, service 
industries, contractors, standards writing organizations and our legislators, all 
working in concert to the ultimate benefit of the customer — the person who is 
being injured and the person who must eventually pay the cost." 

Mr. Brown. We have presented specific points to you about product 
liability and the needs regarding small business. Mr. Hankison goes 
on to say that at the present rate of premium increases, if they continue, 
product liability rates will put small business out of business. This is 
a crisis situation, and if it is allowed to continue, it has the potential 
to destroy small businesses. 

We do have recent experience, and I unequivocally believe that be- 
cause of the hard work of some of the members of this committee with 
regard to the Culver bill — well, that is, the provisions for the 10-year 
carryback and the lifting of accumulated earnings for a post-tax re- 
serve, and again I think the committee is to be commended for the 
hard work and effort they put into that area this year, and at least we 
got on the record this year that item . 

I would like to go on to say that we recognize the difficulty regarding 
the Federal Government working in this area. It has historically been 
a State problem, but we would like to ask this committee to continue 
to work in the areas of product liability to accumulate information and 
to disseminate information to the States in order to get all 40 or 50 
States to the point where we have product liability bills within the 
State legislatures. 

The items that Mr. Hankison goes on to point out are the require- 
ments for lowering the statute of limitations, the elimination of puni- 
tive damages, allow evidence of other sources of recoverv to be per- 
missible, regulate attorneys' continguency fees, restrict the modifica- 
tion of the product as a defense, the state of the art, self -insurance re- 
serves, workplace industries, and rather recently a situation has come 
to our attention as a result of our study, and that is reporting by in- 
surance companies. 

Present law allows the insurance companies to anticipate claims 
and set the rates on that anticipation basis, and what we need, I believe, 
in this country is a review of the actual cases to set the rate for product 
liability. 

40-2S7— 79 3 



Thank you. 

Mr. Cherkaskt. Thank you. Lee. 

We are, in fact, working on some now ideas and some new legislative 
initiatives on product liability insurance. As you all know, it is a very 
complex problem, and the mere fact that finally the Congress has 
gotten focused on it is itself a major step, even that tiny bill of Senator 
Culver attached to the tax hill. But we are under seige on the issue, 
and we are working closely with the Commerce Department to come 
up witli a palatable, reasonable, jumping-off ground for the next 
Congress. 

That doesn't mean we are going to solve it, but we are going to make 
a good attempt at it. OK ? 

I want to skip on to technology innoA'ation. The speaker is Dr. 
Hess of the American Council of Independent Laboratories, who was 

That doesn't mean we are going to solve it, but we are going to make 
a witness at our August 9 and 10 hearings on the under-utilization of 
small business in the Nation's effort. 

Dr. Hess. 

STATEMENT OF DR. EARL HESS, ON BEHALF OF THE AMERICAN 
COUNCIL OF INDEPENDENT LABORATORIES 

Dr. Hess. Thank you. The material I have to submit to you in 
writing is not in the form of a written presentation, but rather, as 
an outline of some issues. I would like to spend a couple of minutes 
talking about our industry and some of the problems we encounter. 

The American Council of Independent Laboratories is a profes- 
sional association of over 200 of the leading independent testing and 
research and development laboratories in the country. Such labora- 
tories fit into the class of high technology professional service firms. 

The subject of innovation is front page news, it seems, almost 
daily. I just attended a session last evening at the National Academy 
of Sciences at which the economic health of our country as it is de- 
pendent upon innovation was discussed in depth by some of the 
Nation's experts. 

We were very pleased to have the opportunity to present testi- 
mony before the Senate and House Small Business Committees on 
the subject of small business and technological innovation in August 
of this year. These hearings for the benefit of those not familiar with 
them were held, largely I believe, to examine the implications of the 
OMB report of March 1977. 

The report from OMB said something about our industry (small, 
high technology firms) that we thought we already knew, but it was 
nice to hear someone else saying it — namely that small business is 
much more effective and efficient in innovations than are large firms. 
By innovation we don't mean developing a laboratory product or 
process, but actually taking that scientific breakthrough and reduc- 
ing it to the marketplace, where the wheels are turning, jobs are being 
created and a product or service is coming out the other end. 

I say again that I really was very pleased to have had a chance to 
express our views on this issue. The bulk of my testimony dealt with 
certain specific problems that our industry is facing. Actually, I gue<s 
if one looks at the bottom line, he can say that if small, high tech- 



31 

nology businesses are indeed as productive as the OMB report would 
indicate, then their success strongly affects the success of our Nation 
as far as innovation is concerned; and the opposite obviously holds 
true. 

In my testimony I offered a general list of items that concern us. 
I would like to talk about a couple of them here. Our industry faces 
all the problems that have been discussed here this morning. "When 
we hear our small business friends talk about paperwork and over- 
regulation and product liability (which Ave call professional liability) 
these are all problems that cause us grief as well. But there are a couple 
of unique problems that we face. 

The first is the impact of unfair competition from not-for-profit 
firms on our industry. There was an article recently in U.S. News 
& World Report which dealt with this problem broadly. For those 
interested in tax revenues, it pointed out what a tremendous loss was 
occurring because of the not -for-profits' gross engagement in commer- 
cial activities. 

That article did not mention specifically the impact of the abuse of 
not-for-profit status on high technology small businesses. Its broad 
language, simply stated, was something like this: Not-for-profits that 
are chartered for specific purposes — for example — educational who find 
themselves crossing over into the commercial or proprietary field are 
competing unfairly with the private sector, and are denying the Gov- 
ernment its rightful tax revenue. Under these conditions, there is no 
way that our industry can be viable. 

I could go on a good deal further in this particular regard. I would 
simply like to point out that ACIL has expressed its serious concern 
in relation to Small Business Development Center (SBDC) legisla- 
tion, not disagreeing with the concept, but thinking alonp; lines some- 
what similar to those Mr. Simone has just offered, in which the private 
sector should be part of the technology delivery system to other small 
businesses. 

Mr. Cherkaskt. That was written into the legislation specificallv, 
that private consultants could be included in any specific State plan. It 
was specifically stated in the report. Maybe it wasn't specific enough. 
We will make sure it gets in there next time. 

Dr. Hess. We are concerned that there be specific directives bj7 which 
the States could be guided. 

Mr. Cherkasky. Let me have something in writing on that later, 
would you, Doctor? 

Dr. Hess. Yes. 

[The supplemental document referred to follows :] 

Any state, in order to qualify for receipt of Small Business Development Center 
(SBDC) funds, must identify a capable agency for the program administration. 
That designated agency must have a developed system for receiving input from 
the small business community about the needs of small business within the state. 
Further, it must be capable of designing programs to meet these specific needs 
and of locating resources within the state that can deliver the needed services 
most effectively and efficiently. A major guideline of the state's SBDC program 
shall be that educational functions and basic research are to be performed by- 
colleges and universities and the actual delivery of the needed services is to be 
carried out by qualified private professional services firms. 

Dr. Hess. We in the laboratory community carry the paperwork bur- 
den common to all groups who employ people, pay taxes and offer a 
product or service. I would like to describe just one of the unique 



32 

aspects of the "redtape" issue encountered by laboratories; the matter 
of lal>oratory accreditation. How many people must come and inspect 
niv laboratory, and how many long forms must I fill out before I am 
allowed to perform work in one specific area? Government agencies 
through their lack of reasonable and coordinated action have created 
a chaotic situation. 

As an illustration — we have gone through a rather long process of 
being certified by the EPA to do water testing in support of the new 
drinking water regulations. "We have a branch laboratory operation in 
Waynesboro, Pa., about 3 miles north of the Pennsylvania-Maryland 
border. I am disallowed from doing work in Maryland, even though 
I have a Federal certification to do it. Further I am informed that no 
certification program for independent laboratories exists in Maryland. 

Mr. Ciierkasky. Maryland is not in the Union. 

[Laughter.] 

1 )r. Hess. Maybe that is the answer. 

I don't want to prolong my presentation. I will turn over my outline 
•of some of our ideas, and I will be glad to supply any additional ma- 
terial which you request. 

Mr. Ciierkasky. Thank you, Doctor. 

[The prepared statement of Dr. Hess follows :] 

American Council of Independent Laboratories, Inc. 

1. reform of tax laws governing commercial activities of organizations pro- 

viding laboratory and professional services 

Despite the consideration in recent years by Congress of a variety of tax pro- 
posals affecting small businesses, one major deficiency in existing law has re- 
ceived no serious consideration. That is, the tax-favored treatment non-taxpayiug 
(nonprofit or not-for-profit) organizations receive under existing tax laws and 
regulations in engaging in commercial activities in direct competition with tax- 
paying organizations. Congressional investigation and review of this fundamental 
inequity is overdue as has been compellingly outlined in a recent Special Report 
on the "Profits in Nonprofit Organizations" which appeared in the November is- 
sue of U.S. News and World Report. A copy of this article is attached (Attach- 
ment A). 

Also provided for the consideration of this Committee are two additional docu- 
ments: 1) A summary memorandum dated October 2, 1978, analyzing the prob- 
lem of tax-favored competition and making preliminary recommendations to deal 
with the problem (Attachment B) and 2) A paper on "The Role of Non-Profits" 
which expands on this theme (Attachment C). 

The devastatingly negative impact the present laws have on small laboratory 
and professional services firms and the negative impact this phenomenon has on 
collection of tax revenues and the proper Federal tax treatment on income from 
commercial activity require immediate attention. 

ACIL is prepared to share with the Senate Committee more detailed informa- 
tion about specific aspects of this basic inequity in the present tax laws. 

2. PROPER IMPLEMENTATION OF THE FEDERAL GRANT AND COOPERATIVE AGREEMENT ACT 

OF 1977 

Traditionally, only public agencies and nonprofit organizations have been elig- 
ible to receive Federal grants. Frequently, a grant award has been made to a 
Monprofit organization to acquire a service, rather than providing that any quali- 
fied organization — nonprofit or taxpaying — compete for a procurement. The re- 
cently enacted Federal Grant and Cooperative Agreement Act of 1077 theoretic- 
ally provides a statutory basis to limit this problem, but the fact is that during 
llio period when planning and study leading to implementing is occurring, more 
not loss, funds are being awarded on a non-competitive basis by means of grants. 

The adverse implications of this method of dispensing Federal funds for small 
businesses requires this Committee's scrutiny and appropriate measures need 



33 

to be developed to assure that small businesses can fairly compete for Federal 
funds. 

3. INCREASED USE OF SMALL TECHNOLOGY BASED FIRMS IS FEDERAL RESEARCH AND 

DEVELOPMENT 

In a report dated March 10, 1977, the Office of Management and Budget in- 
formed the President that "small firms have compiled a striking record of inno- 
vation". This report concluded that -'small firms are inadequately used" in the 
Federal government's acquisition of $26 billion worth of research and develop- 
ment, and that "our country will lose significant high technology capabilities (in 
the absence of) a concerted effort to increase small business R&D awards . . ." 
The report had ten specific recommendations for accomplishing this goal. Over 
one year has passed and these recommendations have not been implemented to 
my knowledge. Another Presidential study is underway which will not be com- 
pleted before next spring. No further study is required. We need action now. 

4. SMALL BUSINESS DEVELOPMENT CENTERS 

The Small Business Administration and the Congress have initiated legislation 
to establish a number of Small Business Development Centers (SBDCs) at uni- 
versities around the country to provide management and technical services to 
small businesses requiring such assistance. We share the goal of strengthening 
the prospects that new small businesses will succeed. However, we think that 
the success of the SBDC program would be enhanced if there were clear and 
unequivocal criteria and guidelines for the operation of these centers. In partic- 
ular, ACID is convinced that the legislation should spell out the proper roles 
of the universities and the private sector in addressing the needs of small busi- 
nesses. The universities' appropriate function is not to deliver services directly ; 
rather they will serve best in the role of coordinators and catalysts, working 
cooperatively with small technical and professional services firms, among others, 
to provide needed help to other small businesses. ACIL is prepared to work on 
guidelines and criteria to define the proper roles of the interested parties in the 
SBDC program. 

5. CONCLUSION 

We support many of the measures others have presented to the Committee for 
consideration. In this brief presentation, ACIL has endeavored to suggest issues 
of special concern to small scientific laboratories throughout the United States. 



[From U.S. News and World Report, November 6, 1978] 

Attachment A 

For Many, There Are Big Profits In "Nonprofits" 

(Tempers are rising over growing numbers of organization's that seem to be 
feasting on tax exemptions, generous donations and cutrate postage. It's a 
pattern that is prodding Congress, officials into action.) 

The word "nonprofit" strikes a sympathetic chord in the hearts of many people. 
It conjures up images of charities and service groups that operate on shoe- 
strings, struggling along with volunteer staff members and bare-bones offices. 

That type of situation does exist in many of the more than 800,000 organizations 
that now enjoy tax-exempt status as nonprofit institutions. About 37 million 
Americans donate their services each year to charities and other voluntary 
organizations that spend about 29 billion dollars annually, the bulk of it for 
worthwhile causes. 

But frequently these operations are something else again. Under the label 
"nonprofit" are organizations that are said to — 

Pay their executives fat salaries and allow them generous fringe benefits. 

Award contracts to their trustees and board members. 

Serve as fronts for commercial enterprises with which they have "sweetheart" 
deals. 

Enjoy special mailing privileges and property-tax breaks that give them a 
competitive edge against taxpaying establishments. 



34 

Engage in wasteful and sometimes fraudulent fund raising with little ac- 
countability to the public. 

Such questions about groups that enjoy special privileges are being asked at 
a time when taxpayers, catching the Proposition 13 fever, are looking under 
ei ery rock for new sources of money to keep government going. 

Says former Internal Revenue Commissioner Sheldon Cohen : "Nonprofits 
are a whole can of worms that Congress has yet to look at in a broad way. I've 
been Mowing the trumpet for years to get lawmakers to spell out clearly what 
Should be tax-exempt and what should not." 

HELPING HAND OR COMMERCIAL FRONT? 

One of the most controversial court cases now pending in Washington, D.C. 
involves two of the nation's biggest non-profit organizations: the American As- 
sociation of Retired Persons (AARP)jand the National Retired Teachers Associ- 
ation (NRTA). The two groups are accused of serving as covers for a large com- 
mercial insurance company. 

In a 27-page complaint, Harriet Miller, former executive director of the AARP, 
charges that the two associations have been used as vehicles to shunt business 
to the Colonial Penn Group of Philadelphia, a company that sells insurance as 
well as travel packages, employment assistance and other services. Leonard 
Davis, named in the suit, is a director and principal stockholder of Colonial 
Penn and was one of the founders of both the AARP and the NRTA. 

According to the complaint: ". . . Leonard Davis has become a multimillion- 
aire from the sale of insurance and other services to elderly people who are 
systematically misled into believing that the primary purpose of the associa- 
tions is the best interest of the elderly. The fact is that AARP was designed 
and created to be, and NRTA was turned into, a group for insurance purposes." 

Colonial Penn is one of the nation's most profitable insurance firms. In the 
five-year period ending last December 31, the company's after-tax return on 
invested capital averaged 30.5 percent, placing it in the top three companies 
with sales of 250 million dollars or more. 

Victor Glasberg, an attorney with Hirschkop & Grad, the firm representing 
Miller, claims that no advertising for Colonial Penn's competitors appears in 
AARP periodicals. The complaint alleges, too, that only Colonial Penn has access 
to the mailing lists of the two groups. The Postal Service also is investigating 
whether the AARP and the NRTA improperly used their cut-rate mailing priv- 
ileges as nonprofit organizations for the insurance firm. 

Attorneys for Davis refuse to comment on the case beyond denying the Miller 
charges point by point in documents sent to the U.S. District Court in Washington. 
The AARP also has filed a countersuit, charging that Miller breached a con- 
sulting contract by suing Davis and others associated with the retiree groups. 

While the courts wrestle with this matter, experts in the tax-exempt field say 
there are many organizations around the country that are straining the definition 
of •nonprofit" to the limits. That's because the law permits many of these groups 
to operate commercial enterprises, often with little risk of losing tax-exempt 
status. Colleges, churches and charities can collect rent on offices and apart- 
ment buildings without paying any taxes on that revenue as long as they own 
those properties outright. Since 1969. nonprofit organizations have been obliged 
to pay taxes on income from "unrelated businesses" such as restaurants or 
factories. However, there are exceptions to that rule, and opinions among local 
IRS examiners vary as to what constitutes an unrelated business. 

The 1969 law, for example, contained a provision that lawyers call "the 
Loyola bailout," which provides that revenues from New Orleans radio and 
television stations operated by Jesuit-run Loyola University would not be tax- 
able as unrelated business income. Instrumental in securing that provision were 
two powerful-Louisiana lawmakers, Senators Russell Long and the late Repre- 
sentative Hale P>oggs. 

Loyola's WWL, a television affiliate, is the No. 1 station in the New 
Orleans market, according to the Rev. Frank Benedetto, a spokesman 
for the station. "Ninety percent of our profits go to the university instead of 50 
percent to T nele Sam." he says, adding that the proceeds from the station are 
the main endowment of the school and provide scholarships to many students. 

Put others around New Orleans view the matter differently. Says one industry 
observer: "It's a difficult, competitive situation. They have more readily available 
money to invest in their product — programming — and in equipment. They're well 
managed, but they play by different rules." 



35 

Playing by different rules, too, are the many colleges and universities around 
the country that operate motels and restaurants and maintain stores that sell 
refrigerators, motorcycles and other items not related to education. Not only 
do these establishments sometimes take business away from local merchants, but 
the revenues are often tax-exempt, depending on the rulings of IRS examiners. 

Explains Joseph Tedesco, director of the Exempt Organization Division of the 
IRS : "It's up to us to determine whether a school can sell a sweat shirt and 
not a Honda, and we must take responsibility for the decision and answer the 
complaints from competing stores." 

More than 140,000 nonprofit fraternal organizations also operate insurance 
arms, health programs and other services, which are tax-free as long as sales 
are directed exclusively to the groups' members. These services often are in 
competition with tax-paying commercial firms. The Knights of Columbus life- 
insurance program, for example, has about 4 billion dollars' worth of insurance 
business. Lutheran Brotherhood has about J.7 billion dollars' worth. 

MAKING TAX AND POSTAGE BREAKS PAY OFF 

Many for-profit companies, feeling the pinch from zooming postal rates and 
higher taxes, are taking aim at the special privileges given to nonprofits. 

Congress now provides the Postal Service with 600 million dollars of taxpayers' 
money annually to make up for nonprofit organizations' lower postal rates. Lead- 
ers of non-profit groups argue that this subsidy is a small price to pay for the 
services they give the public, services that government might otherwise have to 
provide. 

Critics, however, see it another way. Says Charles S. Mill, the president of 
American Business Press : "It is my observation that many nonprofit mailers do 
not involve themselves solely in charitable or educational work, but instead are 
engaged diligently in proprietary activities such as mass-circulation publishing, 
soliciting advertising of all kinds, and selling services such as insurance policies 
to their members. In many cases, these proprietary activities consist of unfair 
competition with tax-paying competitors." 

Mill points out that nonprofit organizations that mail subscription or member- 
ship solicitations at third-class rates pay only 2.7 cents per letter, compared with 
8.4 cents paid by commercial publishers for similar letters. Others add that 
nonprofit publishers pay no taxes on revenues from subscriptions and are allowed 
more-generous tax deductions on revenues from ads that appear in their publi- 
cations. Many pay no taxes at all on advertising revenues. 

Some nonprofit publications have taken out full-page ads in major newspapers 
to show advertisers how their circulations have grown in comparison with other 
magazines' — never bothering to acknowledge the special breaks they enjoy. Says 
Garth Hite, publisher of Atlantic Monthly: "I could double my circulation, too, 
if I had the advantage of the cheap third-class mailing rates paid by nonprofits." 

Thomas Black, advertising sales director for Smithsonian Magazine, a non- 
profit publication, plays down these advantages, saying that it is the quality of 
a publication, not mailing breaks, that wins subscribers. Even so, there are 
signs that the IRS is getting tougher on nonprofit publishers. It has told the pub- 
lishers of several scientific journals that it plans to revoke their tax-exempt 
status. One of the major losers would be the American Chemical Society, which 
publishes 18 journals with a combined circulation of 300,000. The IRS questions 
the society's practice of selling subscriptions at a higher rate to nonmembers 
on the ground that it violates a tax law prohibiting individuals from reaping 
benefits from net earnings. 

The society is contesting the IRS action. The group is also trying to reverse the 
tax policy that requires it to pay taxes on ads in its publications. Secretary Rod 
Hader explains that only ads of a scientific nature are accepted and that the in- 
come from them should therefore not be considered unrelated to the purposes 
of the group. 

The organization has come under criticism from for-profit publishers in the 
scientific field who argue that the gathering of information for its lucrative 
Chemical Abstracts has been enhanced because of millions of dollars in govern- 
ment research grants awarded to the society. 

Also studying nonprofit groups is the U.S. Postal Service, which has grown 
sensitive to increasing complaints about the cheaper rates given to these organi- 
zations. The service is beginning a new system to spot changes in the IRS's list 
of tax-exempt organizations so that special mailing privileges can be revoked 
as quickly as possible. 



36 

"There is a lot of whistle hlowing by ordinary citizens." says Theodore Troy, 
director of the Office of Mail Classification. "When people see 2.4 cents stamped 
on a letter — and they're paying 15 cents — they wonder why." 

THE DEBATE OVER PROPERTY TAXES 

People are concerned, too, about exemptions on property taxes given to non- 
profit groups, a practice that critics say has put more of a burden on homeowners 
and businesses. 

An example of how such exemptions can get out of hand is found in the tiny 
community of Ilardenburg, N.Y., situated in the Catskills. There, 213 homeown- 
ers, facing soaring tax bills as a result of exemptions given to big landowners, 
had their homes declared churches to get them off the tax rolls. The residents 
became ministers of the Universal Life Church, a California-based organization 
that mails out divinity degrees for a $20 offering. 

Robert Kerwick, the community's tax assessor, says he does not blame the 
'residents and has no intention of forcing them to pay unless the courts or the 
state rule that the Universal Life Church is not a bona fide religious group. "I 
saw people join this church who were about to lose their homes because of taxes." 
says Kerwick, who insists that the only solution is for New York and other 
states to impose stricter limits on the amount of property owned by non-profit 
groups that can be exempt from property taxes. 

Kerwick points to several examples in his area of large tax-exempt holdings 
by nonprofit organizations. An 8,000-acre farm owned by the Jehovah's Witnesses 
is able to sell food it raises to state institutions at lower prices than ordinary 
farmers charge because of the tax break, says Kerwick. Also nearby are tax- 
exempt sites of 1,300 acres owned by 13 Zen Buddhist monks and 1,776 acres 
owned by the Nassau County Council of Boy Scouts. Then, too, there is a local 
group of well-to-do residents who donated 3.900 acres of property to a tax-exempt 
conservation group.. Not only did they enjoy a healthy tax write-off for their 
donation, but they swung a deal to retain timber, water and farming rights to 
the land. 

Says Kerwick : "If everyone else can get economic benefits by playing around 
with exemptions, the townspeople believe they can, too. But their real purpose is 
to create a crisis that will force action in the Legislature." 

The situation in Hardenburg is an extreme example; yet other communities 
find it tough to ferret out tax dodgers hiding behind the nonprofit label. Says 
Robert Gustafson of the California State Board of Equalization : "When is a com- 
mune a religious commune? It's up to the Legislature to plug that hole." 

The equalization board has denied some applications for exemption from reli- 
gious groups, but has usually lost in courts. As a result, Gustafson says, many 
groups are amassing large holdings under religious exemptions. The Sino-Ameri- 
can Buddhist Association bought the Mendocino State Hospital in Ukiah, Calif., 
and turned it into a spiritual center. Nyinga Institute, another religious group, 
owns 920 acres of Sonoma County. That's just a small sampling. 

Some communities are urging nonprofit organizations to pay something for 
services they receive. In Boston, where almost 50 percent of the real estate is 
tax-exempt, universities are now required to pay the city a percentage of the 
revenue obtained through the renting of sports arenas and other facilities. Wes- 
leyan University pays Middletown, Conn., for water, sewerage and sanitation 
services. And Cornell University makes an annual payment to Ithaca. N.Y., for 
police and fire protection. Most of the time, however, pleas by city officials are 
largely ignored. 

THE PUBLIC'S RIGHT TO KNOW 

The extent to which nonprofit organizations take unfair advantage of their 
privileged status is not easy to pinpoint, says a tax specialist in Congress, "be- 
cause it's so hard to get information out of them." Church-related groups are not 
required to publish details on their finances. Other nonprofits file annual infor- 
mation returns with the IRS. These returns are public information, but it often 
takes weeks for the IRS to respond to a request to view them. 

Congress in 1909 took strong steps to stop conflicts of interest in foundations but 
did not require public disclosure of their operations. The result, savs .Tames Aber- 
nathy of the National Committee on Responsive Philanthropy, is that fewer than 
-)00 of the 20.000 private foundations publish annual reports. 

One consequence: Manv abuses go undetected. A report issued last vear bv the 
Twentieth Century Fund, a New York research group, stated that '"boards of 



37 

trustees that rigorously maintain army's-length relationships and pursue the best 
interest of the endowment fund above all tend to be more the exception than the 
rule." 

Chris Welles, who prepared the report, points out that a number of foundations 
hold the majority of their assets in share of their major donors' firms. Another 
tendency is to use the services of banks controlled by foundation trustees. 

The 1969 legislation orderd stiff fines for foundation officials engaging in "self- 
dealing," that is, benefiting personally from business transactions with their foun- 
dations. The IRS since then has audited about 25,000 foundations. States have 
also stepped up their surveillance. 

That law, however, did not prohibit conflict-of-interest situations in other kinds 
of nonprofit groups. For example, the Cousteau Society, a New York conservation 
group founded by Jacques Cousteau, the underwater explorer, has an officer and 
a board member who both belong to the law firm that handles the society's legal 
work. In the past, the society has also paid a firm owned by a board member to 
handle fund solicitations and has purchased services from for-profit operations 
controlled by Cousteau. These practices, while frowned on by the Better Business 
Bureau and other charity watchdogs, are legal under current law. The society last 
year raised about 3.2 million dollars. 

In Texas, Samuel Harwell, a former invstment analyst with the University of 
Houston, was sentenced on October 23 to four years in prison on federal mail- 
fraud charges. He also was named as "co-schemer" in an arrangement in which 
he allegedly shunted university investment business to Covington-Knox, a broker- 
age firm owned in part by his former businss partner Roger Knox. The firm is 
accused by the Texas attorney general of selling securities to the university at 
prices righer than market value and buying securities from the institution at 
prices below value. Knox and Aubrey Covington, the firm's principals, denied the 
charges. 

LIVING HIGH ON THE HOG 

Usually escaping notice, too, are the salaries and expenses paid by foundations 
and other nonprofit organiations. The directors of many large charitable trusts, 
such as the Ford Foundation, make more than $100,000 a year, not counting gen- 
erous travel allowances and other fringe benefits. 

Many organizations also maintain sprawling offices and large staffs to disburse 
moneys. Not long ago, one newspaper reporter, asked to attend a Ford Founda- 
tion session on crime, recalled how awed he was at the sumptuous 12-story head- 
quarters and at being wined and dined during his stay. 

The Ford Foundation last year approved 92 million dollars in grants, and 
officials there contend that the responsibilities involved in disbursing that kind of 
money justify the paying of a good salary to the group's president. Still, Chris 
Welles, author of the Twentieth Century study, contends that nonprofits can spend 
more freely than commercial firms do. "High salaries and offices with substantial 
trappings are fairly common in nonprofit organiations. If you don't have to report 
to shareholders, there's much less pressure to keep costs down," he says. 

A case in point is John McCabe, who earns $121,000 a year as president of 
Blue Cross and Blue Shield of Michigan, a nonprofit organization. In addition, 
be is given the use of a Ford Thunderbird and other expensive fringe benefits. 
For example, the company paid his $900 initiation fee to the Detroit Athletic 
Club, as well as a $7,500 initiation fee to the Oakland Hills Golf and Country 
Club. 

- A board member critical of this compensation says : "These are symbols, and 
they are not symbols of an organization trying to hold down health-care costs." 

However, McCabe maintains that he belongs to the clubs for business pur- 
poses and because executives of other firms do. "We're following rather than 
leading," he says. 

McCabe's salary comes from an organization that took in 1.8 billion dollars 
in premiums last year, and one consulting group hired by Michigan Blue sug- 
gested that he was underpaid. However, much smaller nonprofit groups, includ- 
ing charities, pay their officers quite well. The Arthritis Foundation, which 
received about 4 million dollars in contributions in 1976, pays its chief officer 
about $60,000 a year. The Disabled American Veterans, which collected more 
than 20 million dollars in contributions in 1977, had five officers who made more 
than $49.000— the top man earned nearly $63,000. 

Much more lavish examples have been uncovered in recent years. M. C. Van de 
Workeen, executive director of the National Information Bureau, which moni- 



38 

tors charities, says one group that operated Internationally took its board mem- 
bers on world tours three t im«'s a year. Another Midwest-based charity built 
a home complete with stables for the use of its executive director and also pro- 
vided him with a yacht in Florida. 

An official with New York's Office of Charities Registration, which regulates 
fund raising in the state, says far too little attention has been given to salaries 
and administrative expenses of nonprofit organizations. One problem is that, in 
financial reports, these expenses are often included as part of program spending 
rather than broken out separately. "Under this setup, spending for lavish offices 
and big salaries makes an organization look better," he explains, "because it 
boosts the amount of money listed for programs." 

PROPOSED : TIGHTER CONTROLS 

Public charities — the religious, health and educational organizations that 
solicit funds from the public — are among the chief targets of those who want 
to bring reform to nonprofits. At stake is much of the 30 bililon dollars raised 
for philanthropy each year. 

Still unregulated by many states are the fund-raising practices of these non- 
profits, anl examples of excessive spending and other abuses are rampant. 

Id Georgia, for example. Tim Ryles, head of that state's Consumer Agency, 
says there is "no documentation" that money raised by the Georgia Police Be- 
nt Association goes to widows, orphans and other needy people cited by 
telephone solicitors contracted by the PBA. He claims that as much as 80 per- 
cent of the money went to solicitation contractors and that the rest was used 
"to pay for funds for insurance premimums for police members, for collective 
bargaining and for litigation." 

Atlanta homicide detective Sidney Dorsey. president of the Georgia V'\.\. 
says that his group never endorsed any of the statements about widows or chil- 
dren, but that telephone solicitors deviated from previously agreed-on scripts. 

In Florida, abuses by police associations have prompted a new law that limits 
professional solicitors to 25 percent of revenues collected, instead of the 40 
to 80 percent now common. 

Also under fire for alleged fund-raising abuses is the Congress of Racial 
Equality, which has been investigated by states such as North Carolina, Mas- 
sachusetts, Alaska and New Jersey. Mary Joann Reedy, the attorney who 
handled the case for the Massachusetts attorney general, explains that tele- 
phone solicitors working for CORE miscrepresented the group as a federal 
agency connected with the Equal Employment Opportunity Commission. She 
notes, too, that CORE was billing businesses for ads in its magazine that the 
firms never authorized. Prospective donors also claim to have been harassed by 
CORE fund-raisers. In June, CORE agreed, without admitting guilt, to a con- 
sent decree in the Massachusetts case, promising not to engage in misleading 
fund-raising practices. 

The attorney general of California in a recently settled suit ordered the 
executive director of the Animal Protection Institute to resign from the board 
of that group and to account for $17,000 in unauthorized spending. The state 
alleged that the API, based in San Francisco, misused more than $100,000 in 
donations and spent more than 90 percent of its income for administration, 
salaries and fund raising. The executive director, for example, is paid $4,000 
a month. 

Consenting to a judgment by the Xew York State Supreme Court in July was the 
Richard Viguerie Company, a professional fund-raising outfit based in Falls 
Church, Va. The firm agreed to limit its fees to 35 percent of the funds it collects 
for Xew York charities. The state atorney general had charged the firm with 
retaining as much as 75 percent of moneys raised for various charities. Among 
the company's clients w T ere the Children's Relief Fund of the Korean Cultural 
and Freedom Foundation. 

Fund-raising literature for that charity included such statements as the follow- 
ing: "As I write you this letter, thousands of little boys and girls are suffering 
from the terminal forms of malnutrition." In this case, less than 6.3 percent of 
1.5 million dollars collected went to the children, according to the attorney 
general, while more than $920,000 went to the Viguerie firm. Most experts say 
that well-established charities should spend no more than 25 percent of the 
donations they receive on fund raising. 

Abuse of program funds also is cropping up in various nonprofit poverty 
agencies around the country- The Puerto Rican Community Development Project 



39 

was taken over this year by New York City's Community Development Agency. 
That action followed an audit of the project's books that showed what investi- 
gators described as "millions of dollars" of waste through "chronic mismanage- 
ment." The city also conceled a 1.2-inillion-dollar contract w 7 ith another poverty 
group, the Hunts Point Community Corporation, after finding evidence of possible 
fraud. Found in the agency's offices were pads of blank bills from private com- 
panies, such as supply stores, which could be used as vouchers to account for the 
spending of poverty funds. 

ahead: closer scrutiny of nonprofits? 

There are signs of a new campaign to stamp out such abuses and to clip the 
wings of some nonprofits. 

Representative Charles Wilson (D-Calif.) has introduced a bill that would 
require charities to make public the percentages of their contributions that go to 
the causes they represent. 

Also aimed at helping the public to understand better the finances of nonprofits 
is a new audit guide soon to be introduced by the American Institute of Certified 
Public Accountants. These new standards will apply to charities, foundations, 
museums and churches, which up until now have lacked uniform accounting 
procedures. 

The IRS is stepping up its review of nonprofits, particularly in the area of 
unrelated business income. Congress in 1974 established a separate IRS office 
to monitor tax-exempt organizations. Funds and manpower for that operation are 
increasing. A major examination of the 1,500 largest tax-exempt organizations is 
just being completed, and nonprofits are already feeling the heat. 

Says Rod Hader of the American Chemical Society : "The IRS is looking for 
anything it can attack in large nonprofit organizations in order to collect more 
revenue." 

Former IRS Commissioner Cohen argues that what is really needed is a broad 
review by Congress of nonprofit institutions. "So far, actions taken have followed 
a Band- Aid approach," he explains. "Congress simply enacts statutes as a response 
to individual scandals." 

Meanwhile, there is no letup in the flood of new organizations seeking tax- 
exempt status. That number has increased from 33,556 in 1974 to 50,649 last year, 
a growth that alarms people who are skeptical about the benefits given to these 
groups. 

Says Robert Kerwick, the harried tax assessor from Hardenburg : "YVe just 
can't go on giving nonprofit status to every fly-by-night organization that comes 
down the pike. That has to stop, especially the way economic pressures are 
building on people." 



Attachment B 



October 2, 1978. 



Tax-Favored Competition : An Analysis of the Problem and Recommended 
Actions To Deal With It 

This memorandum reviews ways in which non-taxpaying (nonprofit) organi- 
zations are favored under the present tax laws and regulations in competing 
with taxpaying (for-profit) firms providing identical or similar services and 
makes recommendations to eliminate such unfair competition. 

Present tax laws and regulations 

Section 501(c) (3) of the Internal Revenue Code of 1954 provides, in part, for 
exemption from Federal income tax for a corporation organized and operated 
exclusively for scientific research and testing for public safety purposes. 

Section 511 of the Code imposes a tax on the unrelated business income of 
organizations described in section 501 (c)(3). Section 513 of the Code defines 
the term "unrelated trade or business" as any trade or business the conduct 
of which is not substantially related to the exercise or performance by an organi- 
zation of its exempt function. Under section 512(b) (7), (8) and (9). there is 
excluded from unrelated business taxable income, all income derived from 
research for Federal or state governments: in the case of a college, university or 
hospital, all income derived from research performed for any party, and all income 
derived from research performed by an organization operated primarily for the 



40 

purpose of carrying on fundamental research, the results of which are freely 
available to the general public. 

Analysis of inequities under existing law 

The private professional services industry consists of thousands of firms en- 
gaged in research and development, testing, design, planning, data processing, in- 
formation services and consulting work of clients in both the private and public 
sectors. Over 90 percent of such firms are small businesses. Several kinds of non- 
taxpaylng organizations are in direct competition with taxpaying professional 
services firms. 

First, "captive" nonprofit research institutes known as Federally Funded Re- 
search and Development Centers (FFRDCs) or Federal Contract Research Cen- 
ters (FCRCs) provide professional services. The FFRDCs or FCRCs normally 
work principally for a particular Federal department or agency and receive a sub- 
stantial portion of their funding pursuant to a long-term, open-ended master con- 
tract with the sponsor department or agency. These captive nonprofits also provide 
services for other Federal departments and agencies, state and local governments, 
commercial and industrial clients. In 1973, there were 59 nonprofit captive 
FFRDCs and FCRCs, including RAND Corporation, Mitre Corporation and 
others. 

A second category of nonprofit research institutes are the "non-captive" non- 
profits such as Southwest Research Institute, Franklin Institute, Battelle Memo- 
rial Institute, Stanford Research Institute and others. While these organizations' 
sources of funding are more diverse, at least 65 percent of their income results 
from the performance of professional services for various Federal, state and local 
governmental agencies. 

A third group of nonprofit organizations engaged in providing professional 
services is the universities and colleges. Approximately eleven percent of the 
Federal research and development budget for fiscal year 1977 ($23.5 billion) was 
allocated to research and development performed at universities. Of this amount, 
89 percent was "applied" and "development" activity, directly competitive with 
similar services available from the professional services. Universities and colleges 
are providing professional services to commercial and industrial clients as well. 

Private professional services firms, nonprofit research institutes and universi- 
ties, when engaged in the same enterprise activity of providing professional serv- 
ices are treated differently under the present tax laws. Examples of this lack of 
uniformity and equity include : 

1. The blanket exclusion from the unrelated business income tax of applied 
research work performed for governmental agencies or in the case of univer- 
sities for anyone ; 

2. The inadequate guidelines defining when scientific research work per- 
formed for a private sponsor is not carried on in the public interest and is 
therefore subject to taxation ; and 

3. The imprecise distinctions as to when activities are of a type ordinarily 
carried on as an incident to commercial or industrial operations and are 
therefore subject to taxation even if performed for the government. 

These and other deficiencies in the existing tax law, regulations and enforce- 
ment policies result in large amounts of income received by nonprofit organiza- 
tions from professional services not being subject to taxation. 

An examination of the legislative history of section 301(a) of the Revenue Act 
of 1950 (64 Stat. 947) which first established the "unrelated business income" 
provisions of the Internal Revenue Code illustrates the fact that these provisions 
:ire no longer adequate. Section 301 was intended to deal with "unfair competi- 
tion" by tax-exempt organizations engaged in commercial activities. The excep- 
tions for research work were not based on a judgment by the Congress that this 
policy asrainst unfair competition should not be extended to this particular mar- 
ket Rnthor. Congress appeared to conclude that since few profitmaking organiza- 
tions were regularly performing contract research for the government at that 
time, there was no competition in research services, fair or unfair, which needed 
to be nd dressed. 

T>y 1078. the charnctovistics of the marketplace have drastically changed with 
taxpaying firms competing directly with non-taxpayincr entities for governmont- 
sponsored research contracts. Whntever rationale existed in 1950 for the statutory 
exceptions in the unrelated business income tax, no longer applies. 

These gaps in present law hurt both the government and the taxpaying pro- 
fessional services sector. While the non-taxpaying sector could argue that the 
government acquires research assistance at a reduced cost, the facts do not sup- 
port this allegation. 



41 

First, almost all contracts for research and development and for other pro- 
fessional services are cost reimbursement type contracts. The exemption provided 
by these two sections does not reduce the costs incurred by the tax-exempt per- 
former, and the government in turn does not realize any cost savings. Second, 
available evidence indicates that when tax-exempt performers seek or accept 
'•fees" under such contracts these fees are not reduced to reflect fairly the im- 
pact of the tax exemption. The tax-exempt organization is likely, for the most 
part, to choose to maintain competitive price levels and thus to retain a large 
margin of extra profitability. It is this "surplus" resulting from the tax exemp- 
tion which constitutes the fundamental competitive advantage accruing to the 
tax-exempt nonprofit firm. It constitutes, in effect, a subsidy from the Federal 
government to these organizations, to be utilized as their governing officials de- 
termine. These revenues can be used for investment in improved physical plant 
and capital facilities, or for offering high salaries and fringe benefits to attract 
personnel. If the performing unit is a subsidiary of a larger charitable enter- 
prise, part of these revenues may also be siphoned off to support those charitable 
activities. 

In addition, the tax-exempt organization remains free to engage in unfair price 
competition in those circumstances where it perceives that such behavior may re- 
sult in a particularly desirable contract. In short, as a result of this hidden 
Federal subsidy, the exempt organization enjoys considerably greater flexibility 
in the business environment in which both must operate. 

Recommendations 

Unfair competition from non-taxpaying organizations affects a broad range 
of private sector organizations and firms at present. A number of major national 
associations are deeply concerned about the adverse impact of present tax laws, 
regulations, rulings and policies on private professional services. 

As a consequence, it is recommended that immediate consideration is warranted 
of how present laws and regulations could be modified to assure equitable tax 
treatment of all organizations engaged in providing similar services. Such meas- 
ures might include : 

1. Elimination from present law of the broad exemptions contained in sec- 
tion 512(b) (7) and (8), and 

2. Stricter enforcement of the 501(c) (3) exemption and limiting the ex- 
tent to which such an organization can engage in unrelated business without 
losing its exemption. 

Attachment C 

The Role of Nonprofits 

(By John F. Magnotti, Jr., and James S. Hostetler) 

I. An opportunity 

This conference is a welcome opportunity for a divorce group of individuals to 
seek to define, understand and develop guidelines for different kinds of organiza- 
tions when they engage in enterprise activity — in this case, the provision of pro- 
fessional services needed by the Federal government. 

The services being offered by the Manpower Demonstration Research Corpora- 
tion (MDRC) are professional services. There is confusion about what profes- 
sional services are and where professional services capabilities reside. This 
confusion is reflected in the arbitrary and chaotic practices of government in de- 
termining when to "contract-out" for services. 

Private organizations, whether for-profit or nonprofit, share a common interest 
in asuring that government enterprise activity in professional services does not 
expand in ways that are detrimental to the public interest and the private sector. 
Private organizations, whether for-profit or nonprofit, share an uncommonly com- 
mon set of internal business and functional characteristics when engaged in en- 
terprise activities. It is the external rules formulated and implemented by the 
government as they affect for-profit and nonprofit performers which are not com- 
mon and which create inequities and distortions which are damaging to the 
public's interest in enhanced competition and the productive use of public 
resources. 

Until these larger questions relating to the proper roles of the Federal Gov- 
ernment, the nonprofit sector and the for-profit sector are effectively addressed, 



42 

ad hoc arrangements with no overriding logic will continue to characterize the 
acquisition of professional services by the Federal Government. In the hopes 
that with greater factual knowledge will come increased clarity in the relation- 
ships of these sectors, we make the following observations. 

//. Defining the professional services 

One of the few public efforts 10 define professional services occurred during 
the deliberations of the Commission on Government Procurement which pub- 
ftnal report in December of IHTl'. 1 In this report, professional services 
are defined as relating "to such fields as accounting, management, marketing, 
economics, and systems analysis: program evaluation: industrial engineering 
and operations research. The product furnished generally is a report which sets 
forth findings and recommendations for solutions to problems, suggestions for 
improving operations, evaluation of program results, suggestions for alternative 
means to achieve agency objectives, etc. . . . For some time, government agencies 
have engaged professional firms to perform such services in order to supplement 
in-house capabilities. The types of linns engaged are companies, partnerships, 
or corporations — both profit and nonprofit". ' (Emphasis added). 

We would suggest that the definition offered by the Commission on Govern- 
ment Procenrement can be expanded to include firms engaged in research and 
I ■incut, testing, information and data processing, design, analysis, evalua- 
tion, education and training, and management consulting for clients in both the 
public and private sectors. These organizations are not usually engaged in the 
physical aspects of manufacturing. Most are small businesses. The professionals 
who work in these linns usually are trained in one or more of the recognized 
academic disciplines, and academic degrees are an essential part of the profes- 
sional services. 

It is clear that both profit and nonprofit organizations are viewed by the 
Commission on Government Procurement as providing essentially the same serv- 
ices to government customers, and that these services are considered by govern- 
ment managers to be professional services. 

The nature and scope of professional services is not nearly so clear to members 
of the current Administration. A series of attacks have been mounted recently 
against a group disparagingly labeled by President Carter, ex-Office of Manage- 
ment and Budget Director Lance and other Federal officials as "consultants." 
Confusion as to who and what "consultants" are is rampant. In the on-going 
debate about the use of consultants by the Federal Government, many of the 
Federal participants either imply or state that the term "consultant" includes 
professional services firms. A Presidential memorandum of May 12, 1977, states 
that, •'There has been evidence that some consulting services, including experts 
and advisors are being used excessively, unnecessarily, and improperly". 3 This 
sweeping generalization is expanded further if necessary for the development 
of a good story. As an example, in the March 19, 1978 issue of the Washington 
Star, in an article entitled "Rail Improvers Laying Out $30 Million for Con- 
sultants." the writer characterized consultants as "ranging from archaeologists 
and public relations firms to helicopter pilots and the National Urban League." 1 
In OMB Bulletin No. 78-11, issued May 5, 1978, guidelines for the use of con- 
sulting services are established. "Consulting services" are defined as meaning 
"those services of a purely advisory nature relating to the governmental func- 
tions of agency administration and management and agency program manage- 
ment." Included as a specific example of such services are "policy and program 
analysis evaluation and advice." Such services are subject to specific limitations 
on use. Without exploring in depth the application of these guidelines, it should 
be emphasized that further definitional uncertainties and complexities have been 
introduced into the procurement of certain kinds of professional services. Assum- 
ing that this new inhibition on the use of outside sources of expertise does not 
apply, then it is necessary to note the confusion in the Federal Government's 
policy of "contracting-out for services." 

III. Contracting-out 

Government policy requires the use of the private sector to provide necess.iry 
goods and services. This policy is published in OMB Circular A-76, "Policies for 



Keport of the Commission on Government Procurement (U.S. Government Printing 
OflW. Washington, D.C. l!)72». 

2 Ibid., volume 1, p. ;)7. 

3 Presidential memorandum dated May 12, 1977. 

* Watshitiytoii star, March 19. 197S issue. 



43 

Acquiring Commercial or Industrial Products and Services for Government Use." 
Currently undergoing extensive revision, the policy still states that ''Federal 
agencies will not operate an activity to provide a product or service that is obtain- 
able from a private source unless that activity has been justified in the national 
interest." 

Qualified nonprofits and for-profit firms share a common interest in the uniform 
and fair implementation of this Federal policy of reliance on private enterprise. 
The nonprofits which traditionally have received substantial assistance by means 
of grants will find A-76 increasingly important as the requirements of the Fed- 
eral Grant and Cooperative Agreement Act of 1978 dictate more utilization of 
contracts with nonprofit organizations. A sharper understanding of when the 
government should go private (profit or nonprofit) in procuring services is funda- 
mentally important. 

Unfortunately, Congress is confusing the issue of "contracting-out" with legis- 
lation which draws lines on DOD contracting-out which run contrary to A-76. 
Under the DOD Authorization Act of 1978, new broad limitations are imposed on 
acquisition by the Federal Government of professional services. 

These developments simply underscore that before a proper role can be defined 
for nonprofit and for-profit private organizations, the government must under- 
stand when it should utilize private capabilities instead of building up in-house 
government capabilities. 

IV. General factual profiles of profit and nonprofit professional services firms 

In understanding how to utilize nonprofit and for-profit organizations, it is 
necessary to describe generally their evolution. Although based upon the classical 
areas of engineering, architecture and management consulting — the latter actu- 
ally an outgrowth of industrial engineering — the private profit professional serv- 
ices sector, under the impetus of World War II, now includes a wealth of 
scientific, social and technological talent. All in the private sector, all very much 
for-profit, and all essentially non-manufacturing. We estimate that the private, 
profit, professional services sector now encompasses over fifty thousand firms 
with formal payrolls, and generates between fifteen and twenty billion dollars of 
services, about equally divided between industry and government of all kinds. 
Free enterprise exists with a vengeance in the professional services industry. 
A quote from "The Nature of Competition" by Claire Wilcox 5 serves as a basis 
for supporting this assertion. 

"The requirements of perfect competition are five: First, the commodity 
dealt with must be supplied in quantity and each unit must be so like 
every other unit that buyers can shift from one seller to another in order 
to obtain a lower price. Second, the market in which the commodity is 
bought and sold must be well organized, trading must be continuous, and 
traders must be so well informed that every unit sold at the same time will 
sell at the same price. Third, sellers must be numerous, each seller must 
be small, and the quantity supplied by any one of them must be so insig- 
nificant a part of the total supply that no increase in his output can 
appreciably affect the market price. Buyers likewise must be numerous, 
each buyer must be small, and the quantity bought by any one of them 
must be so insignificant a part of the total demand that no increase or de- 
crease in his purchases can appreciably affect the price. 

. . . Further, there must be no restraint upon the independence of any 

seller or buyer, either by customer, contract, collusion, the fear of reprisals 

by competitors, or the imposition of public control. Each must be free to 

act in his own interest without regard to the interests of any of the others. 

Fifth, the market price, unfair at any instant of time, must be flexible over 

a period of time, constantly rising or falling in response to the changing 

conditions of supply and demand . . . Finally, there must be no obstacle 

to elimination from the market ; bankruptcy must be permitted to destroy 

those who lack the strength to survive." 

Wilcox continues by stating that perfect competition ". . . does not exist, 

never has existed, and never can exist." But his concept is useful in providing 

a standard by which competitive realism can be measured. In defining pure 

competition as coming close to the ideal of perfect competition without attaining 

it, Wilcox is describing the situation which by and large prevails in the profit 

sector of the professional services industry. 



renrin?pTfn i n^n a T^ i M AT n0p0ly -^ ^ meric ? n Industry" (TNED Monograph 21). 1941, 
reprinted in Dean, Joel, Managerial Economics. Englewood Cliffs, N.J. : Prentice-Hall, Inc! 



44 

A surprising number of these conditions exist insofar as the for-profit pro- 
fessional slrvfces are concerned. Over 90 percent are small businesses, and the 
firms are ordinarily independently owned by highly trained profit motivated 
entrepreneurs and managers whose choice it was to begin and maintain a for- 
profit professional services business. 

Even the larger firms in the profit group are small when compared to the 
manufacturing side of industry. Computer Services Corporation for example, 
currentlv operates at an annual billing level of over 200 million dollars, as does 
Planning Research Corporation. Booz Allen & Hamilton enjoys an annual gross 
of' about 80 million dollars, while Camp, Dresser & McKee and the BDM Cor- 
poration operate in the 40 to 50 million dollar range. The number of larger 
firms is small also when compared to the thousands of firms in the professional 
services industry classified as small businesses under any of the current classi- 
fication criteria.' Our experience in the late sixties confirms the fact that there 
is no obstacle to elimination from the market. Bankruptcies among profit profes- 
sional services firms during the period were numerous and frequent. 

The fact that the output from these firms in many cases is absorbed by the 
government or the fact that the overall market is monopolistic in no way detracts 
from this freedom of choice. Also, a commonly held monolithic perception of the 
Federal Government should not detract from the reality of thousands of service 
procurements ranging in size from a few thousand dollars to many millions. 
Specifically excluded are the many individuals who are utilized by government 
agencies as consultants at negotiated daily rates. 

During this same period, there has been an explosive growth of nonprofit or- 
ganizations which also provide a broad range of professional services. Initially, 
these organizations were established under favored circumstances to fill a 
vacuum in providing systems analyses and technical expertise not available in 
the private for-profit sector. As the private for-profit sector developed similar 
capabilities, these organizations did not lose their favored status, but simply 
continued and enjoyed a competitive advantage by virtue of Federal laws and 
policies. 

Several kinds of nonprofit organizations are in direct competition with profit 
professional services firms. First, "captive" nonprofit research institutes known 
as Federally Funded Research and Development Centers (FFRDCs) or Federal 
Contract Research Centers (FCRC's) provide professional services. The 
FFRDCs or FCRC's normally work principally for a particular Federal depart- 
ment or agency and receive a substantial portion of their funding pursuant to a 
long-term, open-ended master contract with the sponsor department or agency. 
These captive nonprofits also provide services for other Federal departments and 
agencies, state and local governments, commercial and industrial clients. In 
3'J73, there were 59 nonprofit captive FFRDCs and FCRC's, including RAND 
Corporation, Mitre Corporation and others. 

A second category of nonprofit research institutes are the "non-captive" non- 
profits such as Southwest Research Institute, Franklin Institute, Battelle Me- 
morial Institute, Stanford Research Institute and others. While these organiza- 
tions' sources of funding are more diverse at least 65 percent of their income 
results from the performance of professional services for various Federal, State 
and local government agencies. 

A third group of nonprofit organizations engaged in providing professional 
services is the universities and colleges. Approximately 11 percent of the Fed- 
eral research and development budget for fiscal year 1977 ($23.5 billion) was 
allocated to research and development performed at universities. Of this amount, 
89 percent was "applied" and "development" activity, directly competitive with 
similar services available from the professional services. Universities and col- 
leges are providing professional services to commercial and industrial clients as 
well. 

P. Similarities in internal characteristics 

All professional services organizations, profit and nonprofit alike, are in the 
business of selling professional labor, generally to solve specific problems using 
available technology. Professional services firms, if properly chosen and utilized 
by the government managers, can substantially improve the policymakers under- 
standing of available alternatives and of the probable impact of various policies 
if implemented. The spectrum of problems addressed by these firms, plus the 
ability to use individual consultants as required provide a capability and flexibil- 
ity difficult to duplicate in the government. 

When the particular job for which the professional services firm is engaged 
has been completed, the expense to the government terminates. There is no 



45 

necessity for the government to create new problems to be solved by a new un- 
utilized work force. The cost to the government of acquiring the assistance of a 
professional services firm can be specifically and easily determined. It is the 
bottom line dollar number on the contract. There are no hidden pension costs, 
and there are no hidden costs of continuing employees on the payroll after the 
job is completed. 

In a recent study, the General Accounting Office established that profit and 
nonprofit firms generate equivalent profits when providing services to the Federal 
Government. This contradicts the widespread view held by many that nonprofits 
are in fact nonprofit-making. A similar conclusion was reached in a 1976 study by 
eminent sociologists Dr. Amitai Etzioni and Dr. Pamela Doty of the Center for 
Policy Research in New York. 6 Although the primary focus of the study was 
health-related not-for-profit corporations, the authors assert that their findings 
"are the same for all not-for-profit corporations." They contend that ''existing 
laws and regulations governing not-for-profit corporations are insufficient to 
safeguard the underlying legitimate purpose of these corporations." 

Etzioni and Doty state ". . . omissions, ambiguities and loopholes in the laws 
and regulations governing not-for-profit corporations presently make it possible 
for the trustees and staff of not-for-profit corporations to engage in a variety of 
financial practices which bring them personal profits over and above fees, salaries 
and fringe benefits due them for work performed." The authors hasten to add 
that the practices in question cannot be generally termed "fraud," but are "forms 
of profit-making which are at odds with the underlying rationale of not-for-profit 
corporations, not as currently written in existing laws and regulations but as 
widely held and understood as legitimate expectations by members of society." 
According to the authors, such practices have not been perceived as prob- 
lematic and statutory language has remained imprecise due in part to "the 
strength of the philanthropic tradition in America and the trust long placed in 
the unselfish motivations of those associated with not-for-profit corporations." 
In order to correct the ambiguities, omissions and imprecision, the authors 
recommend : 

A revision of the law covering not-for-profit corporations to explicitly 
exclude any form of compensation of the staff other than salary or fee-for- 
service. 

Persons having potential "conflicts of interest" be required to sever the 
relationship in question before permitted to serve on the board or as an 
official or staff member for a not-for-profit entity. 

Penalties be enacted from any member or trustee of a not-for-profit 
institution engaged in any such conflict of interest transaction. 

Where not-for-profit institutions draw on public funds, the government 
regulatory apparatus should examine fees, salaries and fringe benefits as 
compared to similar institutions, and refuse to certify or recertify for 
participation in government programs those institutions providing income 
grossly above the norm. 
The marketing process throughout the professional services is uniform. In 
order to survive as an organization, the professional services firm, profit or 
nonprofit, must generate a relatively constant flow of contracts or grants. 
Although organizations vary in the detailed approach to marketing, all ensrage 
in intensive customer interaction, the development of ''leads," and the prepara- 
tion of technical and cost proposals for appropriate projects and programs. 

Proposals for grants and contracts vary in administrative detail, but in everv 
case, include organizational qualifications, specific technical staff, a technical and 
management approach, and a price to complete the project. In previous years, 
grants used to acquire professional services were not monitored nearly as closely 
as were contracts. As the perception of profits and nonprofits merge, however, 
most Federal agencies are beginning to establish performance regulations for 
grants approaching the detail and intensity of regulations dealing with contracts. 
Personnel management among professional services firms is identical. Few if 
any professionals choose to work in a profit or nonprofit firm because of ideolog- 
ical concerns of one kind or another. The kind of work determines job choice 
m many cases, but is not relevant in terms of choosing a profit or nonprofit since 
both groups compete 'essentially in the same markets. Competition among organi- 
zations for professional talent is intense, so salary structures and benefit pro- 
grams vary little from company to company. Because of the similarities in per- 



« Etzioni Amitai and Doty, Pamela, "The Profit in Not-For-Profit Institutions," Center 
for Policy Research, New York, N.Y. 

40-287—79 4 



46 

sonnel management, professionals move freely among firms primariy in response 
to demands Of the job market. 

There is little difference among firms in the approach to program perform- 
ance. A program hierarchy is established, headed by a program manager. All 
firms, with varying degrees of success, establish controls designed to permit 
successful program completion within the cost allocated in the contract or grant. 
All linns find it equally difficult to constantly charge the bulk of their profes- 
sionals against existing contracts or grants. 

The only rational conclusion is that both types of organizations are engaged 
in enterprise activities in the same way. Entrepreneurs inhabit both worlds, 
and both types of organizations are strikingly similar internally. However, while 
both appear to be operating by the same internal rules, external rules and proce- 
dures, a product of inadequate and grossly unfair Federal laws and policies, are 
strikingly different. 

1 /. Disparities in external rules 

When not-for-profit research institutes compete with taxpaying organizations, 
the rules of the competition vary drastically. While the for-profit organization 
pays taxes, "nonprofit" or "not-for-profit" organizations are tax-exempt, receive 
governmental grant subsidies not available to for-profit firms, and pay reduced 
postage rates. 

More specifically, consider how private professional services firms, nonprofit 
research institutes and universities, when engaged in the same enterprise activity 
of providing professional services are treated differently under th'e present tax 
laws. Examples of this lack of uniformity include : 

(1) The blanket exclusion from the unrelated business income tax of 
applied research work performed for governmental agencies by nonprofit re- 
search institutes or in the case of universities for anyone ; 

(2) The inadequate guidelines defining when scientific research work per- 
formed for a private sponsor is not carried on in the public interest and is 
therefore subject to taxation ; and 

(">) The imprecise distinctions as to when activities are of a type ordi- 
narily carried on as an incident to commercial or industrial operations and 
are therefore subject to taxation even if performed for the government. 

These and other deficiencies in the existing law, regulations and enforcement 
policies result in large amounts of income received by by nonprofit organizations 
from professional services not being subject to taxation. 

An examination of the legislative history of Section 301(a) of the Revenue 
Act of 1950 (G4 Stat. 947) which first established the "unrelated business income" 
provisions of the Internal Revenue Code illustrates the fact that these provisions 
are no longer adequate. Section 301 was intended to deal with "unfair compe- 
tition" by tax-exempt organizations engaged in commercial activities. The ex- 
ceptions for research work were not based on a judgment by the Congress 
that this policy against unfair competition should not be extended to this 
particular market. Rather, Congress appeared to conclude that since few profit- 
making organizations were regularly performing contract research for the 
government at that time, there was no competition in research services, fair or 
unfair, which needed to be addressed. 

By 1978, the characteristics of the marketplace have drastically changed with 
tying firms competing directly with non-taxpaying entities for government 
sponsored research contracts. Whatever rationale existed in 1950 for the statu- 
tory- exceptions in the unrelated business income tax, no longer applies. 

We believe that government is the loser in its failure to bring analytical 
clarity to its use of the nonprofit. Some have argued that the government acquires 
research from the nonprofit at a reduced cost, but the facts simply do not support 
this allegation. 

First, almost all contracts for research and development and for other profes- 
sional services are cost reimbursement type contracts. The exemption provided 
by these two sections does not reduce the costs incurred by the tax-exempt per- 
former, and the government in turn does not realize any cost savings. Second. 
available evidence indicates that when tax-exempt performers seek or accept 
"fees" under such contracts these fees are not reduced to reflect fairly the impact 
"f the tax exemption. The tax-exempt organization is likely, for the most part, to 
e to maintain competitive price levels and thus to retain a large margin 
of extra profitability. It is this "surplus" resulting from the tax exemption which 
constitutes the fundamental competitive advantage accruing to the tax-exempt 
nonprofit linn. It constitutes, in effect, a subsidy from the Federal Government 



47 

to these organizations, to be utilized as their governing officials determine. These 
revenues can be used for investment in improved physical plant and capital 
facilities, or for offering high salaries and fringe benefits to attract personnel. 
If the performing unit is a larger charitable enterprise, part of these revenues 
may also be siphoned off to support those charitable activities. 

In addition, the tax-exempt organization remains free to engage in unfair price 
competition in those circumstances where it perceives that such behavior may 
result in a particularly desirable contract. In short, as a result of this hidden 
Federal subsidy, the exempt organization enjoys considerably greater flexibility 
in the business environment in which both must operate. 

Congress recognized that unfair competition existed in the disparate tax 
treatment of for-profit and not-for-profit organizations when it enacted the '"un- 
related business income'' tax provisions applicable to nonprofit organizations in 
1950. Unfortunately, the unrelated business income tax is extremely limited in 
its scope and largely ineffective in eliminating unfair competition. For example, 
any research performed by a nonprofit organization for a government unit is not 
covered by the unrelated business income tax. The nonprofit has excessive lee- 
way in determining how much of its overhead is to be allocated to the particular 
activity which may be subject to the tax. What is research intended to be exempt 
is often whatever the nonprofit says it is. 

During the 19(>0's and 1970's, there has been an explosive growth in Federal 
grant programs which provide financial assistance principally to public agencies 
and nonprofit organizations. These grant programs take many forms, including 
research grants, institutional support grants, project grants in-aid. formula 
grants in-aid, organizational support grants, block grants and general revenue 
sharing. These grant programs create a major problem for private professional 
services in that eligibility is almost always restricted to public agencies or non- 
profit organizations. These public subsidies make it infinitely more difficult for 
taxpaying organizations to compete effectively with their nonprofit competitors. 

Beyond demonstrable financial and tax advantages which make is possible 
for the nonprofit to market its services at lower costs than taxpaying organiza- 
tions, there is abundant evidence of government "favoritism" in awarding con- 
tracts to nonprofits. A nonprofit mystique which believes that the work of the 
nonprofit must be superior since it is not-for-profit and consequently independent 
and pure is, of course, simply not grounded in fact. There are good nonprofits 
and bad nonprofits, just as there are good taxpaying organizations and bad 
taxpaying organizations. When both types of organizations are engaged in enter- 
prise activities, then the rules must be the same at a minimum. 

Til. The proper role of the nonprofit 

In the absence of equitable rules governing taxpaying and non-taxpaying or- 
ganizations engaged in enterprise activity, several conclusions are apparent: 

(1) Nonprofits should compete for contract opportunities rather than 
receiving sole source awards. 

(2) Government should be reserved about contracting with new non- 
profits unless they represent a unique capability or resource not available 
from existing private organizations. 

(3) Special analysis is required to assure that a nonprofit is evaluated 
on a basis which does not extend unfair advantages to it when competing 
with a taxpaying organization. 

The corruption of the procurement process, the blurring of distinctions, and 
the aggressive marketing of services has made a sham of an integral part of our 
pluralistic economy : the nonprofit. This symposium is an opportunitv to recog- 
nize the development of the enterprise capacity of the nonprofit at the expense 
of its original mission and to chart ways to create new rules which are fair. 
Success in this effort will assure that each type of organization is used for its 
highest and best use and fair competition will flourish to the benefit of evervone 
in the public and private sectors. 

Mr. Cttf.rkasky. I would now like to call on Randy Seifert of the 
National Home Improvement Council, who will speak on new legis- 
lation in 1979. 



48 

STATEMENT OF RANDOLPH J. SEIFERT ON BEHALF OF THE 
NATIONAL HOME IMPROVEMENT ASSOCIATION 

Mr. Seifert. I would like to address myself, Mr. Chairman, to two 
specific areas and one conceptual approach that might be of interest 
to your work for the small business community. Preliminarily, the 
National Home Improvement Council is the trade association repre- 
senting more than 40 national members who are primarily engaged 
in manufacturing products for the construction industries. These na- 
tional members also include a number of publications dealing with 
the home and the many concerns of the homeowner. 

The council has 42 local chapters extending from New York and 
Washington, D.C., to Seattle and Los Angeles. The chapters number 
more than _>,400 contractors engaged in home remodeling and im- 
provement. The chapter membership also includes lending institutions, 
utilities, and wholesalers. 

First, a word of commendation is due the committee. I do not think 
that any of us working on the independent contractor-employee tax 
issue had any notion at the first of the year that congressional legis- 
lation would* be forthcoming in this session. Such action is a very real 
tribute to the work of this committee and to a more articulate small 
business community. 

The independent contractor-employee issue was handled by Con- 
gress very promptly. It is a matter of real concern to many in the 
small business community that they function as independent eon- 
tractors; that they not be characterized as "employees. " 

Sect ion 530 of the 1978 Revenue Act recognizes those concerns. The 
bill directed that a long-term solution for the definition of "employee" 
be worked out by Congress, not by IRS. I hope that this committee. 
Mr. Chairman, will pursue this matter so that the ultimate handling 
of that problem reflects the concerns of this community. 

Second, it was most unfortunate that the Dispute Resolution Act. 
which was passed in the Senate almost without opposition and which 
obtained a substantial majority vote in the House didn't make it be- 
cause of the two-thirds rule in effect, at the time. The proposed legis- 
lation would offer an opportunity to explore and establish realistic 
ways of handling so-called "small disputes," outside of the tradi- 
tional judicial process. It would offer viable alternatives to the small 
business community for prompt and economic resolution of disputes 
that too often in the past have been dropped simply because of the 
disproportionate costs involved. That legislation would have far- 
reaching impact on the population in general and the small business 
community in its handling of a whole host of business disputes. I hope 
that your committee, and this community, support that legislation in 
the next session. 

Finally, there is a broad-based conceptual approach that I would 
ask you to consider: A "Small Business Board of Review," a Federal 
agency with basic rulemaking authority to amend existing statutes 
and to grant, after hearing and upon proper showing, exemptions 
from Federal statutes for certain defined small businesses, after 
notice and appearance by the particular Federal agency concerned. 

The Federal Trade Commission has rulemaking; authority that per- 
mits it to change commercia] marketplace practices several hundreds 



49 

of years old (holder in due course rule) ; establish standards for ad- 
vertising and labeling of insulation materials; regulate TV adver- 
tising for children ; and to operate in a host of other widely dispersed 
areas. 

If a single review board could do the reverse, specify exceptions 
which might exclude small businesses from the operation of certain 
Federal statutes that really should have no application, then the 
onerous smother of the regulatory process could be softened 
considerably. 

The National Home Improvement Council very much appreciates 
this opportunity to share these views with this committee staff, and 
salutes you for making this forum an annual occasion to which many 
of us in the business community look forward with keen anticipation. 

Thank you. 

Mr. Chekkasky. Thank you, Randy. 

I would like to skip back to the question of capital formation. 

Arthur Levitt, president of the American Stock Exchange, has 
come into the room. He is also chairman of the Advisory Commission 
to the White House Conference on Small Business, and he has been 
a witness on our hearings on capital formation in New York City in 
May of 1978. 

I would like to call on Arthur Levitt at this time. 

STATEMENT OP ARTHUR LEVITT, JR., CHAIRMAN, AMERICAN 
STOCK EXCHANGE, INC. 

Mr. Levitt. Thank you very much. 

Unfortunately I haven't had the opportunity of being here for what 
I understand has been a very productive morning's session, but I 
would like to say that since becoming chairman of the American Stock 
Exchange almost a year ago, I have become persuaded that the coun- 
try's No. 1 economic problem is the problem of capital formation, and 
it is a problem that attacks more significantly the interests of small- 
and medium-sized business, in my judgment, than it does the larger, 
traditional companies of America. 

L T nfortunately, our kind of companies lacks the sort of representa- 
tion the larger and traditional companies have. There is no roundtable 
for our companies. There is no National Association of Manufacturers 
that represents our interests. Very often our interests are different than 
those of the traditional companies, and sometimes adversarial. I think 
we see that particularly with respect to tax policy, but in a number 
of other areas as well. 

I think the problem of communications among ourselves lies at the 
core of this. By that I mean the decision made by General Motors this 
morning is known by senior officials of duPont within minutes or 
seconds, but a decision made by the Dill arc! Department Stores in 
Arkansas may not ever be known by the Smith Drug Co. in Bangor 
or Palo Alto. 

I think the upcoming White House Conference on Small Business 
offers us a very unique and special opportunity. I would encourage 
pepple in this room and others that have an interest to take part in 
this very unique process. As many of you may know, the Commission 
appointed by the President will be holding hearings in some 57 loca- 



50 

tions throughout the United States to which a broad group of small 
business interests have been invited, and at those meetings delegates 
to the White House conference itself, which will take place in 1980 
will be elected by the participants. 

I think it is terribly important that the work of the conference be 
carefully coordinated with the legislative process. What we are con- 
cerned with this morning and what I hear at so many of these meetings 
are very compelling tactical arguments. I think that they are com- 
pelling and they are urgent, but I think we must develop a strategic 
sense as well. Small business, almost by definition, is concerned more 
with tad lcs than with strateg}^ and I think that is a shortcoming and 
a problem. 

We have to plan for the fntnre. We have to devise a legislative plan 
which involves coordination of interest. So T am hopeful that the work 
of the Commission will be coordinated with the Congress and that 
your influence will certainly be brought to bear. 

I appreciate your calling on me and T would like to give credit to 
the work of this committee, and particularly to Senator Nelson, who I 
think is doing an outstanding job. 

Thank you. 

Mr. Cherkassy. Thank you. May T ask one question please? 

You did say the fall of 1980 for the White House Conference? 

Mr. Levitt. Yes. 

Mr. Ctterkasky. I thought it was going to be in January or Febru- 
ary of 1080. Am I mistaken? I just wanted to make sure we are talk- 
ing about the same date. 

Mr. Levitt. It is the same conference. Perhaps the date 

Mr. Ciierkasky. I want to make sure we are not going to two con- 
ferences. 

Thank you for joining us. 

Gerald Nagy of the National Home Furnishings Association will 
speak. 

STATEMENT OF GERALD NAGY, NATIONAL HOME FURNISHINGS 

ASSOCIATION 

Mr. Nagy. I wasn't a regulary scheduled speaker. I hope you don't 
mind if I take 4^ minutes. 

Mr. Ctterkasky. I will time you. 

Mr. Nagy. I expect inflation is going to be a high priority item for 
the committee in the next year. I would like to offer a hypothesis on 
this for you to work on. 

The hvpothesis is: Why is it that a small retailer can't do anything 
to hold down prices and thus support the President's voluntary guide- 
lines program? 

That hypothesis is obviously my conclusion, and I will tell you how 
T got there. 

Back this summer the Washington retailing community thought 
that something was going to happen in the administration with respect 
to voluntary, or perhaps even mandatory, wage-price guidelines. 

We formed two task forces to work on wage-price guidelines, the 
position we should take, and where we should be. 

The reason for the two task forces is that basically we recognize 
retailers are in a terribly vulnerable position when it comes to inflation 
and voluntary or mandatory price controls. 



51 

People tend to blame retailers for the high cost of living. After all, 
that is where we go to buy food, furniture, cars, and so forth. 

If a Government program is going to demonstrate that it is tough 
on controlling prices, the program tends to come down hardest on the 
retailer because that is the most visible example of where the high 
prices come from. 

This is what we learned in the Nixon controls back in 1971 to 1974. 
So we established these task forces in August, and without giving a 
day-by-day description of the many meetings we have attended and 
the many programs we have undertaken, we are coming to the conclu- 
sion that there is very little that an independent small, hometown store 
can do to reduce the rate of inflation by holding down prices. 

We are coming to the conclusion that we are price-takers, not price- 
makers. We are the end result of a long line of inflationary pressures. 

We have to accept high prices from manufacturers. We have to deal 
with other outside cost increases such as increases in minimum wages 
and social security, and we are going to see major increases in these 
costs on January 1. In the midst o*f all these pressures, a retailer tries 
hard not to let these pressures force him into a spiral of ever-increasing 
prices. 

Retailing is a highly competitive field. You pick up the paper any 
day and you can see numerous advertisements on any product. It is a 
highly competitive industry, and no one store can afford to be higher in 
price than any other store, unless he is a bona fide ripoff artist and we 
don't recognize that as the right way to do business. 

What we have come to is the conclusion that we are under very in- 
tense pressures. We really have little option in the way of cutting out 
the fat in a retail operation to hold down the prices. 

In the home furnishings industry our net profit after taxes is only 
2 or 3 percent of annual sales. There is very little we can do to cut down 
extra profits. We are in a very difficult position. 

I think if you were to hold hearings on inflation from the small re- 
tailer point of view to find out why that small retailer really can't con- 
tribute to the anti-inflation fight you would begin to branch out and 
find inflationary pressures that are almost generic to our economy, 
particularly inflationary pressures due to the Government sources such 
as minimum wages, social security, and other regulations. 
^ I think this approach will jell with another topic you may con- 
sider as an agenda item, which is the cost of regulation. 

By studying inflation from the small retailer perspective you may 
get to the cost of regulation through the back door. 

I hope that was 4V? minutes. 

Mr. Cherkaskt. That was 4 minutes 40 seconds. You owe me 10. 

Bill Rustin would like to speak a few minutes on the White House 
Conference. 

STATEMENT OF WILLIAM RUSTIN, GASTONIA, N.C. 

Mr. Rustin. I am Bill Rustin, from Gastonia, N.C. 

I am just curious about what you all think about what is going on at 
these small business conferences. How do you see it happening in the 
local area ? 

Mr. Cherkaskt. Have you been to one yet ? 



52 

Mr. Eustix. Yes, sir. 

Mr. Cherkasky. What are your comments? 

Mr. Ivisnx. Eighty percent of it is lobbying, I think, by small busi- 
nesses who already have loans and guarantees; 20 percent of it is small 
business input. 

Mr. Cherkasky. That is an interesting comment. I have not heard 
that before. 

Ed, do you want to make a comment on this? 

Mr. Richard. Yes. The Cleveland Conference, which I thought was 
excellent, had about 200 small business people in attendance. It was 
on a beautiful Saturday, and that is an amazing turnout. 

Frankly, we found just the opposite. We were all very impressed 
at the input, the specific input that was made by small business people 
who talked about their problems, who came up with some solutions. 
ft was a very meaty session. 

We were somewhat concerned that it would be cosmetic, and many 
of us walked away feeling that it really developed some pretty specific 
inputs. 

I personally was much more impressed with it than I expected to be. 
I don't know what is happening around the country, but we had a 
very representative turnout. We did not see lobbying for people who 
had loans. "We saw a lot of people who wanted things, but they came 
representing all areas, minority business, women in business, problem 
areas, banking. 

We had many leading bankers in the commimity there. We had a lot 
of opinionmakers there, who were very impressed by the needs of the 
small businesses. 

Mr. Cherkasky. Thank you for the comment. 

I spoke to about 30 people yesterday at the Small Business Legis- 
lative Coimcil Executive Committee board meeting, whatever it was, 
and one fellow said he had just been to the Cleveland, Ohio, Small 
Business Conference, and he thought it was a fiasco. I hope that was 
the same one. 

Small businessmen are independent in their thoughts, too. 

Mr. Rustin. I am suggesting to you, sir, that with all the small 
businesses represented through these associations, if they would get 
their independent members out it would make the conference that 
much stronger when it reaches the "White House in January, and I am 
a delegate. For the first 4 or 5 hours of the meeting I attended we 
never got to speak. This is not criticism, sir, of you, but it is something 
I wanted to bring up. 

There were two sides. One wanted to spend more money, Govern- 
ment money, and the other side wanted to hold down spending. I think 
it was a good exchange. But, if we don't do a job of getting our mem- 
bers out, it is not going to be as good a program as it should be. 

Mr. Cherkasky. Thank you for the comment. 

Does anyone have a comment on any of the forums on regional 
meetings they went to? And do they want to make these points now? 

It is a good time to do so. 

[Xo response.] 

Mr. Cherkasky. I would like to throw the meeting open for another 
20 minutes for anybody who has not been called upon to speak who 
lias comments to make. 
5Ti 3, sir. 



53 

STATEMENT OF ROBERT JOHNSON, NATIONAL CABLE TELEVISION 

ASSOCIATION 

Mr. Johnson. I am Bob Johnson, and I represent the National Cable 
Television Association. 

One concern I would like to bring before the committee is the ques- 
tion of whether or not the committee will get involved in regulation 
that passes under the guise of protectionism for one business over the 
other. 

I am talking particularly about the competition between cablecasters 
and broadcasters. 

As most of you know, cable provides a retransmission of broadcast 
systems, and also program origination. 

For the 20 years that we have been regulated by the Federal Com- 
munications Commission, it is our feeling that that regulation has been 
imposed on the cable television industry not to serve the public inter- 
est or to encourage competition, but simply to protect the existing 
broadcasting industry. 

"While we recognize this may bring you in conflict with a number of 
other subcommittees who have primary jurisdiction over communi- 
cations, we in the cable television industry, and most cable operators 
are small businessmen, this is the kind of issue that is really on the 
cutting edge of competition, and we feel that competition best serves 
the public interest. 

Our feeling is that regulation should exist only where competition 
is insufficient to protect the public interest, and this is the kind of reg- 
ulatory question that we would like the committee to address itself to. 

Thank you. 

Ma. Cherkasky. Mr. Fprris, the Chairman of the FCC has stated 
he is interested in competition, and is moving toward deregulation ? 

Mr. Johnson. He is a zero-based regulator. 
_ The FCC has never had the empirical data to establish the regula- 
tion to protect broadcasters from cablecasters. It has been based on 
speculation and intuitive models. 

If the facts demonstrate no need to protect broadcasters, nor the 
profits of a broadcaster, then the regulations should be designed to 
protect the public interest, We have not seen that happen in a number 
of important areas. I will give you one example. 

There is a cable operation being built in Arlington County. The 
cable operator wanted to import distant signals. Channel 2 from Balti- 
more. There is also a Channel 9, CBS affiliate in Washington. If you 
are in Arlington, you can get Channel 2 through an antenna. FCC 
regulations prohibit the importation of that signal on the basis that 
they want to protect Channel 9. The broadcasters argue that local 
Channel 9 will suffer in its ability to provide public service to the 
Washington area. There has never been any empirical evidence or data 
presented to show that this kind of injury would occur to a broad- 
caster, and subsequently to the public interest. 

The Arlington companv had to file a waiver, which cost £70.000 in 
legaHees. to get the FCC to look at the waiver. 

It is still being considered by the Commission. 

These are the problems that face cable operators all across the coun- 
try, and we encourage such issues to be placed before the White House 
Conference. 



54 

Mr. Cherkasky. Lot me ask von a wife-beating question. 

Would you like to see the F< ( 3 abolished, or not ! 

Mr. Johnson. We would like to see the FCC take a new look at 
cable regulations. 

We feel there is B role for Federal coordination of cable regulations, 
because cable regulations and the broadcast and telephone regulations 
are areas of interstate communications. 

i think there has to be some meshing of the various areas. 

There is a bill introduced in the House that would change the name 
and, somewhat, the scope of the Commission. But the regulation 
should be based upon the empirical data that is necessary to protect 
the public interest and not based on the history of protecting broad- 
casters vis-a-vis cable. 

Mr. Cherkasky. You ouglit to run for public office. 

Thank you very much. 

[The supplemental information of Mr. Johnson follows:] 

National Cable Television Association, 

Pay Cable Department. 

November 15, 1978. 
Mr. William B. Cherkasky, 

Staff Director. Senate 8t lect Committee on Small Business, 
Washington, B.C. 

Dear Mr. Cherkasky : Enclosed for your review is a briefing book prepared by 
the National ('able Television Association, the principle trade association repre- 
senting the cable television industry, that summarizes some of the regulatory and 
legislative concerns of cable operators. 

I hope this information will be useful to you in the discussions that will take 
place at tomorrow's meeting. 

I look forward to seeing you at 9 :30. 
With warm regards, 

Bob Johnson, Vice President. 
Enclosure. 

Table of Contents 

I. Introduction : 

(1) Definition of cable television. 

(2) Cable television as a small business. 

(3) Background of Federal regulation. 

II. Summary of FCC cable regulation : 

(1) Signal carriage. 

(2) Syndicated exclusivity. 

(3) Network nonduplication. 

(4) Channel capacity. 

(5) Access. 

(6) Forms and reports. 

(7) Technical standards. 

III. Fending FCC regulatory action affecting cable television : 

(1) FCC economic inquiry into cable/broadcast competition. 

(2) FCC Telco/Cable cross-ownership rulemaking. 

IV. Congressional legislation affecting cable television: 

(1) Rewrite of the 1934 communications act. 

(2) Federal funding for Broadband Communication Systems. 

INTRODUCTION 

Cahte television (a working definition) 

The Federal Communications Commission (FCC) defines a cable television 
system as any non-broadcast facility that distributes signals of television broad- 
en st stations Systems with fewer than 1.000 subscribers are subject to a reduced 
level of FCC regulation. 

CfihJc operators as small hit sine ssmen 

There are 4.000 cable systems serving about 14.5 million Americans in nearly 
9.000 communities. Most systems serve less than 1,500 subscribers and 3,300 or 



55 

85 percent of all CATV systems serve fewer than 5,000 subscribers. On an 
average monthly subscriber fee of $7, most cable systems generate about $126,000 
in annual receipts. It should be pointed out that the SBA defines a small business 
engaged in cable television services as one generating less than 3 million dollars 
in annual receipts. 

Background of Federal regulation of cable television 

The cable television industry is regulated by the Federal Communications 
Commission through a series of complex and confusing rules. This regulation 
has been based on cable's supposed impact on over-the-air broadcasting. This 
"impact" has been the assumption that cable television would adversely affect 
broadcast television. The result of this FCC regulatory policy has been to shelter 
broadcasting instead of encouraging competition between broadcasters and 
cable. 

SUMMARY OF FCC CABLE REGULATIONS 

1. Signal carriage. — FCC rules limit the number of television broadcast signals 
which may be carried by a cable television system. The FCC assumed, without 
any supporting evidence, that the importation of "distant" TV signals into a 
community would injure the local broadcaster. 

NCTA Comment : Cable television has the technological capacity to provide 
multiple channels of entertainment and information Yet, FCC regulations ar- 
tifically restrict allowable signals to handful. These regulatory barriers deny 
service to the public and severely hamper the growth of the developing cable 
television industry 

2 Syndicated exclusivity. — In the top 50 markets FCC rules prohibit cable 
systems from importing any syndicated programming for one year from the 
date it is first sold anywhere in the country. In addition, the cable system may 
not import any syndicated programs which are under contract to a local TV 
station for the life of that contract. 

NCTA comment : These complex regulations were adopted as a copyright 
substitute and are totally unjustifiable now that cable television has been included 
in the copyright law. 

3. Network nonduplication. — Cable systems must black out all network pro- 
grams on an imported station whenever those programs are broadcast simul- 
taneously by a "local" top 100 market station within 35 miles of the cable system. 

NCTA comment : Once again, competition is being thwarted by FCC regulation 
in order to perpetuate a broadcast monopoly and with no factual basis to support 
the alleged harm to the local station. 

4. Channel capacity. — All cable television systems with 3500 or more subscribers 
commencing operations in a major television market after March 31, 1972, (or 
commencing operations outside of a major television market after March 31, 
1077) must have 20 channel capacity and two-way capability. Older systems with 
at least 3500 subscribers must meet this requirement by June 21, 1986. 

5. Access. — Cable television systems with 3500 or more subscribers must provide 
four access channels (public, educational, local government, and leased) if the 
system has sufficient activated capability and demand for full time use has been 
made. Systems with insufficient activated channel capacity to provide for chan- 
nels must dedicate at least one composite access channel if technically possible, 
and must expand access availability to the limits of technical capacity upon suffi- 
cient demand. Furthermore, such systems must make equipment available for 
local production and presentation of cablecast programs. Access channels must be 
made available on a first-come, nondiscriminatory basis. Lottery information 
and obscene or indecent matter is prohibited. 

6. Forms and reports. — Cable television systems with over 3500 subscribers 
must submit the following reports to the FCC each year: 

A. Form 325 — Annual Report of Cable TV Systems. 

B. Form 326 — Cable TV Annual Financial Report. 

O. Form 326A — Computation of Cable TV Annual Fee (suspended pending 
litigation). 

D. Form 395 — Annual Employment Report (EEO). 

E. Annual Report of Subscriber Complaints. 

NCTA comment: Cable operators are faced with an incredible paper work 
burden, which is compounded by the fact that many operators serve several 
"communities" from one system, hence substantially identical forms must be filed 
for each community served. 

7. Technical standards. — Cable television operators are required to meet rigid 
federal technical standards regarding signal strength, interference, leakage, noise, 



56 

etc. Annual performance tests must be conducted to insure that these standards 
are complied with. 

The Commission has preempted the area of technical performance requirements 
to prevent establishment of non-uniform requirements which might hinder sys- 
tem interconnect ability and impede the developments and marketing of new cable 
services and equipment. 

PENDING FCO REGULATORY ACTIONS AFFECTING CABLE TELEVISION 

1. FCC economic inquiry into broadcast /cable competition.- — The inquiry into 
the economic relationship between broadcasting and cable television was insti- 
tuted by the Commission to gather the information necessary for an independent 
reassessment of the regulation of cable television. 

Attached in this section is a summary of the NCTA's response to the FCC Eco- 
nomic Inquiry. 

2. FCC Tele phone /Cable Crossoicnership Rulemaking. — The FCC is re-examin- 
ing its policy regarding ownership and operation of broadband facilities by local 
telephone companies. The purpose of the rulemaking is to determine whether the 
FCC should change its present policy which requires telephone companies seek- 
ing to operate broadband facilities in their service area to apply for a "waiver'' of 
present FCC rules. 

Attached in this section is a summary of NCTA's response to the FCC Tele- 
phone/Cable Crossownership Rulemaking. 

SUMMARY OF NCTA COMMENTS IN THE ECONOMIC INQUIRY 

This inquiry into the economic relationship between broadcasting and cable 
television was instituted by the Commission in order to gather the information 
necessary for an independent reassessment of the regulation of cable television. 
The primary Commission interest in this inquiry was noted to be a determination 
of the impact of cable television on local broadcast station operation. Tlio Com- 
mission admits that previous regulation has been based on an ''intuitive model" 
of cable's impact, which assumed, without evidence, that the increased viewing 
options available on cable would cause a decline in local station audience, a 
corresponding loss of revenue and an eventual decline in local station service. 
particularly local programming. The information submitted by the National 
Cable Television Association in these comments demonstrates that this 'intuitive 
model" is a totally inaccurate representation of the relationship between cable 
and broadcasting. 

The research submitted by NCTA in these comments provides a definitive, 
substantive statement on the relationship of cable television to broadcasting and 
the degree to which federal intervention is legitimate. 

NCTA submits that: 

(1) Restriction of cable television development through regulation of signal 
carriage is completely unwarranted. All regulations governing the number ami 
type of television signals carried on cable television systems should be eliminated. 

(2) There is no evidence that restriction on cable television is necessary to 
protect the broadcast or programming sectors or the public interest. Research 
undertaken by NCTA completely refutes the Commission's "intuitive model." 
showing that: 

(a) Audience loss due to cable is minimal, averaging less than 8 percent. 

(b) IJIIF stations, particularly independents, benefi through the increased 
audience levels resulting from cable. 

(c) The assumption of a direct one-to-one relationship between audience 
and revenue is completely invalid. 

(d) Local broadcast programming is the least vulnerable to any assumed 
impact from cable since it delivers higher revenue per viewer and per 
minute compared to other programs. 

(e) Cable competition will, contrary to the assumptions of the static 
"intuitive model," have a positive impact on broadcasting by forcing them 
to make a greater effort to serve the public. 

(3) Cable development, particularly in the major (Top 100) television markets, 
has boon seriously inhibited by the Commission's regulatory program. Cable 
system development in the major television markets 2 during the years 1072-1977 
accounts for anly 12 percent of total industry growth during that period. 

i Notice of Inquiry in Docket No. 21284. FCC 2d , FCC 77-407. para. 2. (here- 

Inaftrr Inquiry). 

2 It should ho noted that the 100 major television markets account for 86% of all tele- 
vision households. 



57 

(4) Relaxation or elimination of restriction of signal importation would provide 
an environment conducive to cable development, both in new markets and 
through expansion iu existing markets. This would result in a diversity of choice 
in new markets and would enhance the public interest. New major market cable 
systems must achieve a 50 percent subscriber penetration rate in order to ensure 
financial viability. Mature systems in major markets have achieved only an 
average penetration rate of slightly over 30 percent carrying the full quota of 
distant signals authorized under current FCC regulations. 

In view of these findings. NCTA submits that elimination of all regulations 
serving to specify the number and type of signals (or programs) carried by cable 
television systems is warranted. Regulation must be based on hard economic 
evidence that absent such restriction, the public would be harmed. No such evi- 
dence exists and, as a result, current regulation of cable television harms broader 
public interest considerations by unnecessarily restricting freedom of choice. 

BEFORE THE FEDERAL COMMUNICATIONS COMMISSION, WASHINGTON, D.C 

In the matter of revision of the processing policies for waivers of the Telephone 
Company — Cable Television "Cross-ownership", Sections 63.54 and 64.601 of 
the Commission's Rules and Regulations — CC Docket No. 78-219. 

In re Position of National Telephone Cooperative Association for a General 
Waiver in Rural Areas of the Telephone Company — Cable Television Cross-own- 
ership Rules. Sections 63.54 and 64.601 of the Commission's Rules and Regula- 
tions—File No. W-602-58. 

To the Commission : 

COMMENTS OF THE NATIONAL CABLE TELEVISION ASSOCIATION 

The National Cable Television Association hereby submits its comments on 
the above captioned Clarification and Notice of Proposed Rulemaking regarding 
the telephone company — cable television "cross-ownership rules", released August 
15, 1978. 
/. Introduction and summary of position 

NCTA is the principal trade association representing the cable television in- 
dustry. We commented previously on the National Telephone Cooperative Asso- 
ciation's original petition for a general waiver of the telco-cable cross-ownership 
rules and will, at this time, comment on the Commission's response to that 
position. 

Much attention has focused on the question of how to expand telecommunica- 
tions facilities and services in rural areas. Cable television, with its broadband 
ability to provide services ranging from specialized health and educational pro- 
gramming to transmission of broadcast signals, is the only single vehicle able to 
meet the diverse communications demands of rural areas. 

The question before the Commission at this time concerns ownership and op- 
eration of broadband facilities by local telephone companies. In 1970 the FCC 
prohibited telephone companies from constructing and programming cable tele- 
vision systems in their service area. 1 Waiver process was established to consider 
special cases where cable service would not be possible except through a telco 
operated system. The basis for the Commission's action was the history of abusive 
and predatory conduct by the telephone industry in its past involvement in 
broadband service. 

The National Telephone Cooperative Association (NTCA) argued that the 
waiver process was unduly burdensome for small, rural telephone companies and 
that the public would be well served by a general waiver of the rules for areas 
with density of under 30 homes per mile. NTCA argued that these areas were 
not feasible for independent cable systems, and that telco broadband facilities 
should therefore be permitted without a waiver. 

The National Cable Television Assocation (NCTA) is deeply concerned about 
the ramifications of telco entry into the broadband market. While we believe 
that easier access to certain very low density areas might be warranted, these 
areas must be very tightly defined and limited to those cases where a competitive 
market situation truly could not exist. 



1 Telephone companies are. however, permitted to construct broadband facilities and 
lease capacity to independent nonaffiliated companies in their service areas. Final Report 
and Order in Docket No. 1S409, 21 FCC 2d 307 (1970). 



oS 

NCTA strongly believes that a federal policy which promotes a competitive 

marketplace will result In the widest possible range of services to rural areas. 
NCTA has reviewed the various options for improved rural communications 
service and conducted extensive research to determine the most effective means 
of insuring maximum service while protecting the competitive nature of the 
market. 

As a general policy, telephone companies or cooperatives must continue to 
he prohibited from extending their monopoly power into the provision of n.m- 
monopoly services. There is no evidence that the current FCC policy limiting 
telco cress-ownership of cable systems is contrary to the public interest or has 
deterred cable development in rural areas. To the contrary, the distortion of 
the competitive market by monopolistic telephone companies which provided the 
basis for the original cross-ownership ban continues to be a valid concern and 
must be fully considered in current deliberations, as well as the effect of the 
present waiver procedure on telco provision of broadband service. Analysis of 
the waiver petitions submitted since the inception of the cross-ownership ban 
demonstrates that, contrary to XTCA's contention, waivers are processed rela- 
tively quickly, burdensome showings are not required, and a liberal grant policy 
is in effect. 

NCTA submits that telephone companies wishing to construct and operate 
broadband facilities must be limited to low density areas not feasible for inde- 
pendent cable development and receiving inadequate television service. Except 
in the lowest density situations, the teleo must bear the burden of proving that 
no alternative means of service is available. NCTA recommends the following 
tiered approach to cross-ownership waiver petitions : 

(1) Telco's seeking a waiver to construct and operate broadband facilities in 
areas with up to six homes per mile should be authorized to do so without an 
extensive waiver process. 

(2) Telcos seeking a waiver to construct and operate broadband facilities in 
areas with a density of 6-20 homes per mile must demonstrate that their entry 
into the provision of broadband service is necessary to insure its availability. 

(3) Waiver for telco const ruction and operation of broadband facilities in areas 
with over 20 homes per mile should be .strictly limited, with the telco bearing a 
considerable burden of proving that no alternative service is available. 

NCTA believes that its tiered approach to the cross-ownership question meets 
the Commission's goal of "encouraging competition in broadband transmission 
facilities, yet relieving telephone companies of the burden of preparing expensive 
and unnecessary showings". 2 Certain additonal provisions must, however, he 
included in any modification of the cross-ownership restrictions in order to 
protect the competitive market wherever possible. These provisions include : 

(1) Limiting the size of the community to be served and the size of the parent 
company of the telco requesting cross-ownership waiver ; 

(2) establishing a process for divestiture of either broadband facilities or 
program functions as a possible course of action to be considered when popula- 
tion or density exceeds recommended ceilings or the "waivered" telco is acquired 
by a parent of over one million telephone subscribers : 

(3) limiting the reduced showing waivers discussed herein to telephone com- 
panies planning to offer services in areas' not currently receiving adequate tele- 
vision service: 

(4) processing cross-ownership waivers expeditiously, with a liberal grant 
policy for unopposed waivers to serve areas with under 20 homes per mile : 

(5) relaxation of FCC cable regulations in low density rural areas; and 

(0) requirements for telcos holding cross-ownership waivers to file annual 
reports with the Commission, similar to the FCC Forms 325 and 326 filed by 
cable operators. 

NCTA believes that adoption of the recommendations offered here will result 
in substantial increases in the level of communications service available in rural 
areas. The policies suggested attempt to remove those regulatory and economic 
barriers which have deterred cable growth in rural areas. By limiting telco 
construction and operation of broadband facilities to those areas where con- 
struction of a stand-alone cable system would not be feasible, the competitive 
marketplace, with its vastly superior service alternatives, is protected. 



- riarifirntion and Notice of Proposed Rulemaking, FCC 78-516, Aug. 15, 1978. para. 27, 
(hereafter Notice). 



59 

PENDING CONGRESSIONAL LEGISLATION AFFECTING CABLE TELEVISION 

1. The rewrite of the 1934 Communications Act. — On June 7, 1978, House 
Communications Subcommittee Chairman, Lionel Van Deerlin, (D-Calif.) and 
former ranking Minority Member, Louis Frey (R-Fla.j, introduced the Com- 
munications Act of 1978. (H.R. 13015) 

Healings were held on the legislation by the Subcommittee during 1978. Mr. 
Van Deerlin has stated that a revised bill will be reintroduced in the 96th 
Congress. 

The Chairman of the Senate Subcommittee on Communications, Ernest F. 
Hollings (D-S.C.) has also announced plans to introduce legislation to "amend" 
the 1934 Communications Act. Senator Hollings is expected to introduce his 
bill at the beginning of the 96th Congress. 

Enclosed in this section is a brochure titled "A Review of Cable Television and 
the Communications Act of 1978" that has been prepared by the NCTA. It pro- 
vides the NCTA's response to H.R. 13015 and sets forth the cable industry's 
objective in any legislation designed to up-date the Communications Act of 1934. 

2. Federal funding for Broadband Communications Systems. — Congress and 
the Federal Communications Commission are increasingly concerned with ex- 
panding the telecommunications services available to rural areas underserved 
by conventional broadcast television. The construction of rural cable television 
systems is one obvious solution, and several members of Congress have proposed 
legislation which would extend federal low-interest, long-term utility construc- 
tion loan programs to include cable television construction. 

In 1962 Congress amended the Rural Electrification Act to exclude funding 
for the construction of commercial cable TV facilities, taking specific action to 
address the potential for monopolistic abuses of telephone control over cable TV 
service. It was clear from the beginning of the rural telephone program that 
Congress specifically intended that telephone companies keep out of non-tele- 
phone business. 

On February 6, 1978, a bill, H.R. 10769 was introduced by Representative Ed 
Jones and on April 24, a companion measure, S. 3003, was introduced by Senator 
John Melcher (D-MT) that proposed to provide low interest REA loans to tele- 
phone companies to construct cable television and other broadband services in 
rural areas. 

On another legislative front, the Communications Act of 1978 proposed the es- 
tablishment of a National Telecommunications Agency, as part of the Executive 
Branch, which would establish a program for the provision of low T -interest loans 
for rural telecommunications facilities, services and systems. 

Grants, loans, and loan guarantees for the construction of broadband facilities 
in rural areas have, at one time or another, been offered through such federal 
agencies as Rural Electrification Administration, Farm Homes Administration, 
Small Business Administration, and the Economic Development Administration 
and Office of Minority Business Enterprises of the Department of Commerce. 

NCTA comment : As the Jones/Melcher Bills are presently structured, mem- 
bers of the cable television industry would be specifically excluded from eligi- 
bility for these federally assisted loans. Additionally, the bills would also pro- 
vide rural telephone companies an unfair and anti-competitive advantage over 
cable firms which must compete for their funds in the investment market at 
higher rates. Such legislation is also contrary to the intent of Congress in its ini- 
tial authorization of federal assistance to telephone companies, and is in con- 
flict with the current federal communications policy which prohibits telcos from 
owning cable TV outlets. 

NCTA has proposed that : 

Federal funding should be made available to independent (non-telco) cable 
companies desiring to expand existing systems or begin new service in rural 
areas, 

Federal support for telco construction and operation of broadband facilities 
must be limited to those telephone companies holding FCC cross-ownership 
waivers and subject to the same controls included in the waiver, 

Cross-ownership waiver should be awarded on a case-by-case basis and limited 
to areas with under 20 homes per mile. Except for very low density (under 
homes per mile) situations, telcos requiring a waiver must demonstrate the 
inavailability of alternate service options. 

Federal funding for telco construction of broadband facilities to be leased 
to independent programmers should be limited to rural areas with a density of 
less than 20 homes per mile, and 



60 

The various federal funding programs should be coordinated through a lead 
agency and be made available to all qualified parties consistent with the objec- 
tive of achieving the broadest range of communication service through a com- 
petitive market. Safeguards must be in place to insure equitable treatment of all 
industries. 

objective of any funding program should be the promotion of maximum 
telecommunications service and presentation of a competitive marketplace with 
an emphasis on service rather than any single technology or industry. 

A Review of Cable Television and the Communications Act of 1978 

ISSUES AND COMMENTS 

Introduction 

On June 7. 197S, House Communications Subcommittee Chairman Lionel Van 
Deerlin (D-Calif), and ranking Minority Member Louis Frey (li-Fla), intro- 
duced the Communications Act of 1978 (IIR130ir, >, 

This legislation is intended to replace the 1934 Communications Act, the 
Federal law under which the Federal Communications Commission has been 
regulating telephone, television, radio and other communications services. 
Cable television is not mentioned in the 1934 Act for the simple reason that it 
did not exist when the Act was written. Nevertheless, cable television has been 
regulated by the FCC as "ancillary to broadcasting," and, as a result, been 
subjected to regulation designed to limit consumer choice and protect television 
broadcasters from competition. 

NCTA supports the efforts of Congressmen Van Deerlin and Frey to update 
national communications polilcy. However, there are provisions within the 
current legislation that demand careful review. The following topics related to 
the new Communications Act are of great significance to the future of cable 
television : 

A Federal Purpose for Cable Television ; 

Federal/ State/Local Regulation of Cable Television ; 

Telephone/Cable Television Cross-Ownerships ; 

Separate Subsidiaries — Cross Subsidization; and 

Prohibiting Cable Operators from Programming Their Systems. 

The majority of quotations in this overview are from the Hearings on HR 
13015 conducted by the House Communications Subcommittee. It is the Sub- 
committee's intent to re-draft this legislation after evaluating information 
presented at these hearings, and introduce new legislation after the first of the 
year. 

For further, more detailed information on the cable television industry's 
response to this legislation, contact NCTA's Government Relations Department. 

A FEDERAL PURPOSE FOR CABLE TELEVISION 

Background 

HR 13015 (Section 102(b)), provides that the new Communications Regula- 
tory Commission (CRC) will not have jurisdiction over "any intrastate tele- 
communications facility" which does not utilize the electromagnetic spectrum 
in the direct distribution of its service to consumers. As a result, there is no 
Federal recognition or role for cable television, while the communications 
entities with which cable competes are dealt with on the Federal level. 

NCTA Position 

('able television currently provides service to one out of every five house- 
holds in the United States. It is projected that by 1981, 30 percent of all 
households will lie served by cable television. 

Today, cable television systems are interconnected by satellite and terrestrial 
microwave in order to provide the public multiple program options from 
national distributors. In fact, the cable television industry is now the na- 
tion's leading user of domestic communications satellites with nearly 800 earth 
stations in use or nearing completion. 

Cable television is an interstate, national medium which also has a unique 
capability of serving local communities. As such, a baseline Federal policy should 
ablished. This Federal purpose should provide a coordinated national 
The absence of such a Federal purpose would inevitably lead to con- 
flicting non-Federal regulations based on parochial, not national, interests. 



61 

What Others Have Said 

Charles D. Ferris, Chairman, Federal Communications Commission : "If cable 
television provides new services for the public it could have a significant im- 
pact on national telecommunications policies . . . HR 13015 would preclude 
Federal cable regulation, presumably in order to stimulate new services, but the 
bill would not pre-empt non-Federal cable regulation ... I wonder, however, 
if it is consistent for the bill to endorse regulation by the marketplace and to 
de-emphasize Commission regulation, while ignoring potential state regula- 
tion." — July 18, 1978. 

James Quello, FCC Commissioner : "It is my frank opinion that total abdica- 
tion of jurisdiction over cable television may be ill-advised ... it seems to me 
that rather than deleting all Federal jurisdiction over cable television, the bill 
might well provide for assertion of jurisdiction in specified areas or under 
certain circumstances." — July 18, 1978. 

Abbott Washburn, FCC Commissioner: "I also share his doubts (Ferris) 
about the wisdom of removing all Federal regulation from cable television. This 
could end up subjecting the cable television industry to a crazy quilt of state 
and local regulations." — July 18, 1978. 

Dean Burch, Former FCC Chairman : "I do not agree that cable is not part 
of the national scheme ... I think cable is an important part of our telecom- 
munications system." — July 19, 1978. 

Fred Ford, Former FCC Chairman : "It is my view that cable television is 
engaged in interstate commerce under the provision of this bill despite the 
language of Section 102(b)." 

■'. . . I have a very strong feeling that in order to have a unified national system 
the Congress should exercise its prerogative to regulate this national business." — 
July 19, 1978. 

Sister Angela Ann Zukowski, Communications Office of the Archdiocese of 
Cincinnati : "We support the concerns raised by many over the neglect of cable 
TV in the current draft of the proposed Communications Act. The prediction is 
that cable television will someday revolutionize communications and television 
as we know it today. In their rush to Federal deregulation, the drafters of this 
I ill should have paid much closer attention to this rapidly growing industry." — 
September 15, 1978. 

FEDERAL/STATE/LOCA'L regulation of cable television 

Background 

Section 102(b) of H.R. 13015 prohibits Federal regulation or oversight of 
cable television. Additionally, the bill establishes no guidelines for cable regula- 
tion at the state or local level, nor does it limit the number of levels of govern- 
ment which may regulate or the manner of regulation that may exist at the 
non-Federal level. 

NCTA Position 

HR 13015 will generate the same kind of restrictive regulation at the local 
level that it abolishes at the Federal level. 

The bill would permit a state or local governing body to repeal the regulatory 
mistakes which have previously been made in Washington and are now recog- 
nized as ill-conceived and anti-competitive. Under H.R. 13015, non-Federal gov- 
ernments would be allowed to develop restrictive rules for the purpose of retard- 
ing cable service in order to protect broadcasters from competition. 

XCTA has presented to the Communications Subcommittee documented ex- 
amples of states and/or local communities that have restricted either cable 
entry or particular services, because of cable-competitor pressure. 

Current Federal standards have been the major barrier preventing burden- 
some non-Federal regulation. Even at present, cable television is subject to three- 
tier regulation — local, state and Federal. There are issues of national policy that 
warrant Federal cable television guidelines. Likewise, there is a role for non- 
Federal oversight — either at the state or local level, but not both on identical 
issues. 

If the Congress determines that a national communications medium such 
as cable television should be deregulated at the Federal level, the Congress 
should also assure that a competitive environment free of unnecessary regulation 
also exists at the non-Federal level. 

What Others Have Said 

Newton Minow, Former FCC Chairman : "In the case of cable, that is a place 
where the technology is changing so fast that I don't see why we would want 

40-287—79 5 



62 

to transfer that out to 50 states, each having its own rules, which I think would 
tend to Impede a very rapidly changing technological advance."— July is>, 1978. 

Abbott Washburn, VC^ Commissioner: "I think it subjects the cable television 
industry to kind of a never-never land of perhaps even as many as 66 different 
State sets of regulations. There are elements that need regulation ar the Federal 
lev* -I."— July 18, 1978. 

Edward Hayes. National Conference of Black Lawyers: "... I respectfully 

31 that in its effort to correct the past difficulty, the now Act goes too far. 

Total Federal deregulation such as that contemplated in HR 13015 can only 

cause chaos in the cable industry and not further the public's need for the services 

which could be provided." — July 20, 1978. 

Rep, John Murphy, D-New York : "There are those of us who favor the 
development of cable, because it can provide the public with a multiplicity of 
channels for a wide variety of programs and services . . . but if national inter- 
connection is to become a reality, a Federal administrative agency must set the 
technical standards for compatibility among systems to insure that cable pro- 
gramming can flow through the nation." — July 27, 197S. 

Jack Corman, National Rural Center: "I have some questions, but no answers, 
about whether Federal deregulation, particularly of cable television, may not 
result, perversely, in more regulation and less diversity. It is possible that the 
regulatory vacuum Mill be filled by a bevy of State and local rules analogous to 
the situation produced when Title XX of the Social Security Act simplified social 
services delivery." — July 20. 1978. 

Dean Burch, Former FCC Chairman : "I am not suggesting . . . that the Com- 
mission should have detailed regulatory power over cable, but I do think there 
should be a point at which the Commission, through the Congress, should give the 
Commission authority to pre-empt certain of these areas from the State and 
local government, if State and local government interferes with the national 
scheme."— July 19, 1978. 

TELEPHONE/CABLE TELEVISION CROSS-OWNERSHIP 

Background 

Section 332 of HR 13015 permits any telephone common carrier to create a 
separate subsidiary to operate any service which the CRC determines to be 
"telecommunications" including cable television. Thus, all current provisions of 
law designed to insure fair competition by the telephone company are repealed, 
including the Federal Communications Commission's ban on cable/telephone 
cross-ownership, and the Justice Department's 1956 Consent Decree, in which 
AT&T agreed not to engage in non-common carrier communications services such 
as cable television. 

NCTA Position 

Empirical evidence was presented at the hearings on HR 13015 demonstrating 
that entry of the telephone company into the cable business means the end of 
competition and the inequitable and inefficient expansion of a new monopoly 
service. The FCC in 1970 banned telephone companies from providing cable 
television services in areas wdiere they maintained telephone operations because 
of a documented record of telephone company anticompetitive conduct. 

Additionally, it has been demonstrated in a number of administrative and 
legislative proceedings that marketplace forces cannot function where one 
industry (telephone) has a total monopoly over the gateway (poles) to which 
another industry (cable television) must gain entry in order to do business. 
HR 13015 repeals the 1978 pole attachment law which provides a Federal or 
State forum for resolution of pole attachment disputes as a means of preserving 
competition in telecommunciations services. 

The result of letting the telephone companies into the cable television business 
would be simple : telephone companies would he able to cross-subsidize from their 
monopoly services into cable television, making it impossible for independent 
cable companies to compete and survive, thus resulting in an expansion of the 
telephone monopoly. 

The fable television industry is not seeking protection from any technology. 
If telephone carriers can provide a "one-wire" communications capability with 
fiber optics, coaxial cable or any other facility that is more technically 'efficient 
for delivering video services than cable television, there is nothing in current 
law to prevent, them from doing so, nor does the cable industry seek limitations 
on their right to do so. It is essential, however, that the telephone monopoly 
not be expanded into the competitive area of programming video services. 



63 

It is one thing to allow the telephone monopoly to build the communications 
facility with the capability of serving the Nation's telecommunications needs 
of the future, it is yet another to allow this everexpanding monopoly to control 
the programming over this facility. 

What Others Have Said 

John Shenefield, Assistant Attorney General for Antitrust, U.S. Department 
of Justice : "In the absence of some Federal regulation, and in the absence of 
the now existing Consent Decree . . . one can't simply allow the telephone com- 
pany to move into new areas without at least satisfying an assumption that 
the telephone company wouldn't automatically take over, in effect, all of tbe 
cable television business." 

"It does seem to me that you cannot blindly assume that the rules that apply 
across industries of an average sort in this country will inevitably work out 
when you are dealing with a corporation the size of AT&T against the kind of 
regulatory background that we have seen over the past year." — July 19, 1978. 

"The FCC, after reviewing the evidence, concluded that telephone com- 
panies should be limited in their franchise areas to providing only the hard- 
ware for lease to CATV operators. The Antitrust Division strongly supported 
that rule, and I haven't seen any evidence that this limitation on telephone 
company involvement in CATV no longer makes sense." — August 3, 1978. 

Rep. John Murphy, D-New York : "Precisely how far should we permit AT&T 
to invade other and competitive fields? It is a doubly important question before 
us, because this bill would authorize AT&T, through a separate entity, to 
engage in telecommunications activities and in activities 'incidental to tele- 
communications.' This is a very stretchable authority. Cable would clearly be 
open to AT&T, as would the present shadowy area dividing communications 
and data processing, but how far should AT&T be unleashed? It seems to me 
the bill as written is vague." — July 27, 1978. 

Howard Gan, Cable Television Information Center, The Urban Institute : 
"If you are letting the telephone company into this business, you have to seri- 
ously consider the limitations on what the phone company can do and what 
it can serve, because the cable industry may talk from its own vested interest 
point of view in terms of an 'elephant dancing with a flea,' but the fact is, the 
phone company is a giant." 

"If you don't provide some limitation, some restrictions or some oversight to 
where they can serve, you may very well have a one-wired Nation, which in 
some respects could conceivably be good, but I think the Orwellian implica- 
tions of this should be considered by the Subcommittee." — July 20, 1978. 

Sister Angela Ann Zukowski, Communications Office of the Archdiocese of 
Cincinnati : "We believe there is a serious need to clearly define the rights of 
the suppliers of programming (cable TV) and the suppliers of transmission 
facilities . . . We recognize AT&T and others are already super-power indus- 
tries. Such super powers should not be permitted to monopolize potentially com- 
petitive communication facilities by serving as supplies of both programming 
and transmission facilities. We would therefore suggest that regulation be 
established to protect the rights of the growing local cable industry in this 
regard." — September 15, 1978. 

SEPARATE SUBSIDIARIES/CROSS SUBSIDIZATION 

Background 

As previously discussed, Section 332 of HR 13015 allows any common carrier 
to provide, thru a separate subsidiary, any service which the Communications 
Regulatory Commission determines to be telecommunications, or "incidental to 
telecommunications." This provision opens the door to the telephone company 
using the monopoly profits from its switched voice service to subsidize new entries 
into competitive services until all competition is eliminated. 

NCTA Position 

The cable television industry has dealt with the telephone company's "separate 
subsidiaries" for 20 years, and knows that the creation of a separate subsidiary 
does not prevent unfair practices. The inherent power of the parent monopoly is 
passed on to the subsidiary, making fair competition impossible. 

The Justice Department brought suit against AT&T because it was using its 
monopoly position in voice communications as the basis for squelching com- 
petition in other non-common carrier services. The 1956 Consent Decree, which 
forbids AT&T from offering non-common carrier services, was the result of that 



04 

suit. Even today, the Justice Department's Antitrust Division has a suit against 
AT&T for alleged anticompetitive practices, and there are numerous civil suits 
currently pending. There is no reason to believe that the telephone monopoly will 
not return to its abusive anti-competitive practices if safeguards such as the 
Consent Decree are eliminated. 

Additionally, the threat of this giant corporation using revenues ohtained from 
monopoly services to cross-subsidize other, competitive telecommunications serv- 
Ices Is real. The telephone company argues that a uniform system of accounts 
will protect against cross-subsidization. However, it has been demonstrated that 
this is a meaningless safeguard for the marketplace. 

The cable television industry is not alone in realizing the dangers of allowing 
the telephone company into all other areas of telecommunications services. Review 
the following remarks by other industry and public policy representatives. 

What Others' /hire Said 

John Shenefield, Asst. Attorney General, Antitrust Div., U.S. Department of 
Justice: "Essentially, we allege that AT&T currently controls too many strategic 
'bottlenecks,' and has used them tactically in combination to eliminate com- 
petition unlawfully. Thus, for example, AT&T has maintained its equipment 
monopoly by denying firms other than Western Electric a fair chance to sell to 
the 80 percent of the potential market AT&T and its operating companies control. 
Similarly. AT&T has successfully blocked competition in long-distance markets, 
by denying competitors access to the 80 percent of local exchange facilities Bell 
controls. And it has sought to block potentially competitive local distribution 
systems including cable television and mobile radio by denying them access to 
necessary local facilities or the national intercity network AT&T control." — 
August 3, 1978. 

Walter Hinchman. Former Chief, FCC Common Carrier Bureau: "I am virtu- 
ally convinced, from my various involvements over the decade, that the (Bell) 
system is largely beyond the effective reach of both Federal and State regula- 
tion and may therefore be impervious to most attempts to competition as well, 
over the long haul." — May 15, 1978. 

Charles Ferris, Chairman, Federal Communications Commission: "These near- 
monopolies and the opportunities afforded to AT&T for anti-competitive conduct 
have created a variety of new problems which the Commission has addressed 
using the tools available under the 1934 Act. These problems will continue to 
have to be addressed since the bill, even with its emphasis, on competition, is not 
likely to have any immediate impact on AT&T's existing market power." — August 
9, 19TS. 

Joseph Fogarty, FCC Commissioner: "When an industry is dominated by one 
Jinn which owns the vast bulk of all facilities used for telecommunications 
transmission, the marketplace forces may not operate as economic theory teaches 
us they should. AT&T's own tariff data filed at the FCC admit this. If AT&T 
and another carrier offer similar services at similar rates. AT&T will get 100 
percent of the business, according to its own figures. Only when the differential! 
in rates exceeds 10 percent will the competitor begin to attain a substantial 
market."' 

••Without retention of extensive regulatory control over rates and practices. 
it is inconceivable that companies of such disparate size can compete 
on an equal footing. The possibilities for cross-subsidization are simply too 
great." 

'•. . . the Bell System is a very efficient, well-run organization which provides 
excellent telephone service to this country. However, competition has always 
been antithetical to AT&T's philosophy."— August 9, 19TS. 

Daniel Grove, Telecommunications Association: "Another issue of importance 
to users is cross-subsidization, an issue which, we believe, the Congress should 
confront more squarely. So long as a carrier is providing both competitive and 
noncompetitive services, the possibility is real for a carrier to subsidize losses on 
competitive services with income earned from services against which no competi- 
tion exists. Even the threat of such cross-subsidy undercuts the growth of com- 
petitive marketplace." — August 10. 1978. 

L. C. Whitney. National Data Cori>oration : "It appears likely that the end 
result will be that Section 332 will unshackle a giant in the belief that competi- 
tion is the panacea. This will be the result in spite of antitrust laws or in spite, 
of the 1956 Consent Decree, in spite of the history of practice's at least questioned 
enough for the Justice Department to again be involved in a major antitrust 
action against AT&T, in spite of the FCC's years of frustrating effort to have 



65 

legal tariffs filed, in spite of the statements made by the Chief of the Common 
Carrier Bureau to the effect that they had lost effective regulatory control of 
AT&T. I see this section opening the floodgates for AT&T to enter the areas of" 
data processing, computer product lines, and other such areas previously pro- 
hibited, entering not as a true competitor, but unregulated monopoly.'' — August 
10,1978. 

Orville Wright, Ad Hoc Committee for Competitive Telecommunications 
(ACCT) : "Studies have documented that AT&T, for instance, has not only the 
opportunity to cross-subsidize its competitive offerings with revenue derived 
from monopoly service customers, but indeed, that it has strong incentives to 
do so." — August 10, 1978. 

Fred S. Lafer, Association of Data Processing Service Organizations : "ADA- 
PSO's concerns with this provision (Section 332) are many. To begin with, this 
section appears to grant carriers blank immunity from the antitrust laws. If 
enacted, Section 332 would surely have an adverse impact on competition. Rather 
than compete, carriers could simply acquire their competitors . . . Conspicuously 
absent from this section are any provisions which would assure that the com- 
petition offered by carriers and their affiliates is not supported by monopoly 
power and resources or by control over essential communications services."— 
August 1, 1978. 

Vico Henriques, President, Computer & Business Equipment Manufacturers 
Association : "The consensus is that accounting is not sufficient in and of itself. 
The accounting system that is in place has not provided, from its inception, ade- 
quate safeguards or even measures the possibility of cross-subsidv." — August 
1, 1978. 

PROHIBITING CABLE OPERATORS FROM PROGRAMMING THEIR SYSTEMS 

Background 

Although HR 13015 is silent on the issue of divorcing the owner of the cable 
facility from the programming aspects (known as "separations"), there are 
those who propose such a measure if cable television is to be considered as a na- 
tional medium and included in a redraft of HR 13015. 

NCTA Position 

A policy separating cable hardware from software should not be implemented 
during the developmental stages of cable television. The keys to the development 
of cable television are the wiring of additional communities and the provision 
of new and diversified services. Outside program suppliers have been unwilling 
or unable to provide this program diversity for cable television. Thus, cable 
operators have been forced to enter into the programming business themselves. 
Artificial restraints placed on the cable industry's ability to finance and imple- 
ment such efforts would only serve to hinder such services being provided to 
the public. 

It may be suggested that the cable industry's position in favor of keeping the 
telephone company out of communications software is inconsistent with the 
position that the cable industry should offer both hardware and software. As 
explained previously, if the cable industry does not involve itself in program- 
ming, then there is no new programming. In addition, there is no reason to 
believe that the regulatory policy applicable to the giant telephone company 
should be imposed on the comparatively small cable television industry. There 
is a proven record of telephone company anticompetitive abuses, there is no 
similar record on the part of the cable industry. 

One alternative, some suggest, is to implement separations "within ten years 
or so." Such a policy mandated without a demonstrated need is yet another 
example of regulation for the far distant future, without any basis in present 
day needs, problems or facts — it would be "regulation on theory." 

Congress should be extremely wary of restricting the normal flexibility of the 
marketplace at a time when cable technology is changing so rapidly. 

WHAT OTHERS HAVE SAID 

John Shenefield. Assist. Attorney General. Antitrust Division. I T .S. Depart- 
ment of Justice: "I suppose one might begin to think about the issue (of cable. 
concentration and separations), at least in the present framework as one in which 
you have control over one possible set of communications options, but the viewer 
has a range of possibilities that he has access to . . . given present status of cable 



CG 

television. I wouldn't feel strongly about it one way or the other." — August 3, 
197& 

Henry Geller, Asst. Secretary, U.S. Dept. of Commerce, National Telecommuni- 
cations & Information Agency : "At one point in the Staff Report we propose it 
(separations) 7 years after enactment of that particular proposed legislation. 
I think all such figures are arbitrary and that you really have to allow discretion 
bo the CRC or the FCC to decide when. It may be that there is never any neces- 
sity for it ... it would be a judgment that would have to be made on the facts-"— 
August 1,1978. 

Mr. Ciierkasky. Is there a comment back there ? 

STATEMENT OE TOM WENNING, OF BISON & WENNING 

Mi . AYexxixg. I am Tom Wenning, partner in the law firm of Bison 
& Wen nine/. I am here representing two trade associations in t lie food 
industry. One is the National- Food Brokers Association (NFBA), 
representing independent local sales agents for manufacturers of food. 
grocery, and related products. Mr. Mark Singer, president, sent you a 
lit ter earlier. 

One. primary concern that NFBA would like to urge you to take a 
look at. and one of the gentlemen from the Homewares Association 
mentioned earlier, that is inflation in general, and in particular what 
the increased burden of the social security taxes are doing to small 
business employers and employees. 

As you know, in the coming year, this is going to be the first time 
that a drastic increase in the social security taxes, resulting from 1977 
amendments, is going to be felt by both employers and employees. 
XFBA believes that some time around January 1, 1970, there is going 
to be a tremendous rise in the blood pressure of employees and 
employers. 

Second, in regard to the tax policy, food brokers are, in order to 
increase their business efficiency and perform functions for their prin- 
cipals, are having to turn to more technological advancement; mainly, 
computer ordering and so forth. 

XFBA would urge you to continue your fight for the small business- 
man to retain more of their earnings for this type of investment, in 
capital formation. 

Third, XFBA would like you to take a more effective look at the 
enforcement of Federal and State antitrust laws, especially against 
di sen minatory pricing practices. 

XFBA believes more could be done in this area to engage in over- 
sight activities. 

As far as the National Association of Retail Grocers of the United 
States (XARGUS) is concerned, President Frank Register regrets 
previous commitments prevented his attending today, XARGUS rep- 
resents primarily local owners and operators of retail foodstores. those 
that operate primarily in the local communities in most of the United 
States. 

Of major concern to NARGUS is the wage and price guidelines that 
are being implemented now. Retail grocer members are particularly 
concerned with how the minimum wage and social security increases. 
effective January 1, 1979, are going to be reflected in those' guidelines. 

There are going to be substantial increases both in the minimum 
wage and the social security areas. In addition, health insurance costs 
to provide pregnancy disability coverage will be increasing. In talking 



67 

with one company the other day, they said it would represent a 15- 
percent increase in their health costs. 

Food retailing is a labor-intensive industry, and these are Govern- 
ment policies that are being factored into their labor costs that are 
going to have a tremendous affect in the coming year. 

In addition, retail grocers are concerned about food labeling legis- 
lation proposals that are being fostered before the Congress. 

The Food and Drug Administration, at the same time they want 
more power to regulate food retailers, push more authority over onto 
the States. FDA really is asking for more power than it can exercise 
at this time. 

NARGUS thinks the whole area of regulatory reform and inflation 
would be good areas for this committee to follow in the coming year, 
and would be glad to assist in that. 

Thank you for this opportunity to express these views. 

Mr. Cherkasky. Thank you very much. 

[The supplemental information of Mr. Wenning follows:] 

National Food Brokers Association, 

Washington, B.C., November 3, 1918. 
Gaylord Nelson, 

Chairman, Select Committee on Small Business, U.S. Senate, 
Washington, B.C. 

Dear Senator Nelson : Thank you for your letter about meeting with the staff 
of the Senate Small Business Committee on Thursday, November 16, 1978. A 
previous commitment will prevent my attending this meeting, but I have request- 
ed a representative from our law firm Bison and Wenning to appear on our 
behalf. 

We appreciate the fine work the members of your Committee and staff have 
done for small business especially in the field of taxation. A large share of the 
progress in reducing federal taxes on small concerns has been due to your 
Committee's efforts. 

For 1979, we suggest the following issues be given attention : 

(1) Appropriate action to reduce the burden of increased social security taxes 
on small business employers and on employees. 

(2) Consider changes in current tax policy that will allow small business to 
retain more earnings to help meet its growing need for capital. 

(3) Develop more effective enforcement of federal and state antitrust laws, 
especially against discriminatory pricing practices. 

The year 1979 will be a time of great challenge for small business. We look 
forward to working with your Committee in helping to meet this challenge. 
Sincerely, 

Mark Singer, President. 

Mr. Cherkasky. Next is Marvin Leffler of the National Council of 
Salesmen's Organizations. 

STATEMENT OE MARVIN LEEELER, CHAIRMAN OE THE BOARD, 
NATIONAL COUNCIL OE SALESMEN'S ORGANIZATIONS, INC. 

Mr. Leffler. Thank you, Bill. I appreciate this committee, because 
I think that it provides an opportunity for us to realize that the small 
business community is not monolithic in structure. I think we are 
falling into a pattern that we say "small business," like some people 
say "big business," and we evoke an image of small business being a 
totally united group and agreeing on everything. 

I think it is important for us to get together once in a while and 
realize we don't agree on everything. For example, our group would 
not wholly agree with the gentleman who was interested in the inde- 



68 

pendent contractor issue. There are times when people in our orga- 
nization are truly employees. They work for only one individual, but 
they are compensated solely on commission, and as a result of that 
form of compensation have to pay their own social security and are 
not protected by pension plans and other matters. 

So thai those people in our organization would tend to be opposed 
to any definition that did not take their problems into consideration, 
more especially in view of the present social security schedule, which 
was touched upon by the previous speaker, where the difference is 
rather significant. 

We are looking at a social security figure which by 1987, based on 
present projections, will be $3,045.90 — that would be the employee's 
share of the tax. If he is an independent contractor, is operating in a 
corporate status, and has a corporation of as few as two people, he is 
in for a $6,090 tax. 

Now. when you gel into those kinds of numbers, there is going to be 
some tremendous resistance. 

The other thing that I would like to touch on very briefly is that 
in thinking of small business, once again, it comes in sizes — really 
small, medium, and large. There is very, very small small business, 
medium small business, and large small business, and the problems are 
not always fin used in the same direction. Some in the larger segment 
of the small business community are delighted with the progress made 
with having the product liability insurance tax roll back in the last 
bill, and we are delighted for them, but it doesn't do any good for us or 
the smaller manufacturers that we represent who don't have the profit, 
even if they search back 10 years and ahead 7. They aren't going to 
find enough profit to handle an award of $300,000 or $400,000. 

What they need is the insurance. They need a way for the Govern- 
ment to underwrite or support the insurance along the lines of the 
Xelson bill last year. What they need is for the Federal Government 
to do something, if at all possible, to prevent some of the liability 
occurring in the first place by some of the legislation that was touched 
on before. 

I would like to direct your attention to the problems with the IRS 
plans, which obviously do not directly concern this committee. It is a 
tax matter, but when we are making recommendations in terms of 
pension plans for the small business community, I think it would be 
useful for us to think about those people in that community who are 
providing for their own pension and who are limited to a maximum 
of $1,500, whereas on the Keogh the limitation is $7,500, and whereas 
on the corporate business plans, the limitation is 25 percent of salary 
in a regular corporate plan. 

So what we are doing is effectively discriminating against a whole 
segment of the community that is not capable of having any other 
pension provision other than IRA, and we have limited the amount 
they can contribute. 

Thank you very much for your time. 

Mr. Cherkasky. Thank you. Our tax counsel says there is no ra- 
tionale for the various pension plans, except the larger corporations 
have more clout and also have a better tax situation. 



69 

[The supplemental information of Mr. Loftier follows:] 

The National Voice of Salesmen, 
National Council of Salesmen's Organization, Inc., 

New York. N.Y.. November 8, 1978. 
Mr. William B. Cherkasky, 

Executive Director, Senate Committee on Small Business, 
Washington, D.C. 

Dear Bill : .Senator Nelson's letter of October 11th inviting us to the agenda 
session on November 16th, suggested that we send in advance a brief outline 
of the items that we wish brought up. 

Accordingly, I am attaching the following memorandum for the use of the 
Committee. 

I shall be looking forward to seeing you. 
Sincerely yours, 

Marvin Leffler, 
Chairman of the Board. 
Enclosure. 

To Staff of Senate Small Business Committee From Marvin Leffler, Chair- 
man of The Board of National Council of Salesmen's Organizations, Inc.. 

draft proposals for discussion with small business committee staff, 
thursday, november 16, 1978 

National Council of Salesmen's Organizations believes the following matters 
require priority treatment by the Small Business Committee when it sets its 
agenda for the 96th Congress ; 

Social security taxes 

The pressure on the small businessman which will result if the 1977 schedule 
of Social Security rates is not amended will be worse in many instances than 
that engendered by the Federal income tax itself. 

In fact, the fine effort of the Small Business Committee in getting rates re* 
duced for profits under $100 million dollars can more than be wiped out by 
Social Security taxes which will rise to $3,045.90 for employees in the maximum 
bracket by 1987. 

We would like a study made to study the practicality of other solutions to 
the Social Security problem such as a small surtax on income tax. It is apparent 
that the 1977 bill was enacted hastily and must be reconsidered. 

I.R.A. plans 

Small Businessmen are frequently unable to provide for a corporate pension 
plan particularly with some of the ERISA restrictions. Mostly, though, there 
is an absence of sufficient profit. The I.R.A. plan thus becomes an excellent 
vehicle for management and employees of small business concerns to set aside 
tax deferred pension funds. 

However, the limitation of $1,500. as a maximum contribution is unfair. The 
Keogh plan has a $7,500 ceiling and corporate plans can go to 25 percent of 
salary. It is not equitable to limit I.R.A. contributions to $1,500 and the Com- 
mittee might wish to study this matter in preparation for any tax bill which 
might be introduced in 1979. 

Double taxation of dividends 

Lack of sufficient cash is a frequent reason for small business .corporations 
to omit dividends, but even where cash is available, the penalty to the small 
businessman is too great when he must declare dividends from an after-tax 
surplus and then be taxed again personally on the proceeds. 

We realize this matter is complex, but it should certainly be studied. 

Product liability insurance 

Congress made an effort to help small business by providing for a ten-year 
carryback and accumulating earnings relief in the 1978 tax hill section dealing 
with product liability exposure. Further action should be taken in 1979 to 
provide for a tax deductible product liability reserve. 

It should also review the standards for determining liability resulting from 
product-related injuries. 



70 

Small business depreciation regulations 

Senator Nelson's bill to speed depreciation for small firms should be rein- 
t reduced to 1979 and its passage sought by small business advocates. 

Mr. Ciikiikasky. Would you identify yourself please? 

STATEMENT OF WILLIAM T. DISS ON BEHALF OF THE AMERICAN 
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 

Mr. Diss. My name is William T. Diss, and I represent the American 
Institute of CPA's. 

We have an extensive report that we have presented before, and it 
will shortly be revised and ready for the convening of Congress. 

As broad highlights, we also compliment the committee on its efforts 
in two areas that did emerge in the Revenue Act of 1078. First, the 
partial improvements in the allowance of ordinary deductions for 
small business stock losses, and second, further alleviation of subchap- 
ter S corporation pitfalls. 

We believe legislation in the small business area should focus philo- 
sophically on a small business that meets the tests and is owned by 
direct investors; that is, people who have a 10 percent or larger stake, 
and by employees of the business. 

With regard to tax benefits that should be extended to this type of 
enterprise, we agree more attention should be given to losses sustained 
on both the original investment in the business, and also for "cleanup" 
investments that are made when the business has failed, all to the effect 
of allowing ordinary deductions rather than the restrictive capital loss 
treatment which now applies. 

Seconding the remarks of another speaker : The preservation of small 
business does argue for a rollover provision under which profits can be 
deferred on the sale of a small business. There is the inducement under 
the present tax law for the disappearance of the small business firm by 
a tax-free merger into a publicly held company. 

In the tax accounting area we were disappointed that the deprecia- 
tion measure did not succeed, either simplified depreciation or elimina- 
tion of salvage from the ADR regulations. 

Xext. with respect to inventory accounting we recommend expansion 
of the concept that now applies to department stores, and that is the 
Government-published index which would simplify the calculations 
for LTFO inventories. 

In the area of capital formation, we believe the limitation on ordi- 
nary losses in a failing enterprise is significant, also the present ERISA 
scheme which imposes prudent fiduciary rules which have a tendency 
of taking funds from the small business and requiring that they be 
invested in securities issued by large business enterprises to meet these 
fiduciary rules. 

We recommend that the rules be waived as accounts in the pension or 
profit-sharing plans, held for the benefit of shareholder-employees, so 
as to be available for reinvestment in the small business involved. 

Finally, we recommend that the area of business investigation ex- 
pense deductions be liberalized. We believe this also is important for 
capital formation. 

Again, we remind the committee of our larger report on subchapters 
improvements, and particularly the provisions that would allow a small 
business investment company to become a shareholder in a subchapter S 



71 

corporation. Presently, subchapter S corporations are foreclosed from 
this financing source because SBIC's prefer to make a loan with some 
form of equity, either current or potential. 

Thank you. 

Mr. Cherkasky. Thank you very much. 

[The supplemental information of Mr. Diss follows :] 

American Institute of Certified Public Accountants. 

Washington, B.C. November ll h 1978. 
'Sir. Herbert L. Spira, 

Chief Counsel, Select Committee on Small Business, 
U.S. Senate, Washington, B.C. 

Dear Herb : In Senator Nelson's letter of October 11, 1978, he asked those who 
planned to attend the meeting with the staff on November 16th to submit an 
outline of their suggestions several days in advance of the meeting. Enclosed is 
a summary of the topics which our Small Business Taxation Subcommittee is 
currently considering. This list has not been updated for changes made by the 
recently enacted Revenue Act of 1978. 

As we mentioned in our luncheon meeting with you earlier in the year, a major 
area in which we are interested is LIFO inventory indexation. Bill Diss, who 
testified at Senator Haskell's jobs tax credit hearings in Denver in February 
and who attended last year's meetings with the staff, will accompany me to the 
staff meeting. If time permtis, I believe that Bill would like to say a few words 
about LIFO indexation and about some of the other small business tax issues 
which we believe are of primary importance. 
Sincerely, 

William R. Stromsem, 
Manager, Federal Tax Division. 
Enclosure. 

Federal Tax Division, Small Business Taxation Subcommittee, Tax Revision 

Proposals 

The Small Business Taxation Subcommittee has studied materials obtained 
from small business interest groups, tax practitioners, legislative proposals, pre- 
vious AICPA tax policy statements, and the Small Business Administration Task 
Force Report on Venture and Equity Capital for Small Business. This review, 
and intensive discussions at Subcommittee meetings, indicate that the present 
income, gift, and estate tax system poses significant disadvantages for the small 
business enterprise compared to the large publicly held enterprise. 

Our analysis addressed the areas of (1) losses from unprofitable business 
operations, (2) disposition of profitable enterprise, (3) continuity of family 
ownership in the enterprise, (4) operation of a profitable business, and (5) 
capital formation for the enterprise. 

The Subcommittee recommends that selected proposals for small business tax 
revision be addressed by the next Congress. This report specifies and explains the 
more significant small business tax revisions which should be considered. 

Reference is made to the separate proposal of the AICPA Tax Division for com- 
plete revision of the Subchapter S provisions. 

i. recommendations 

A. Losses from unprofitable business operations 

1. Small business enterprise. — Eligibility for the small business tax revisions 
should be related to an enterprise (proprietorship, partnership, or corporation) 
which is more tban 50 percent owned by direct and employee investors. Further- 
more, the enterprise must not have registered any securities under statutes ad- 
ministered by the Securities and Exchange Commission, or made an offering of 
securities under "Regulation A". Finally, the firm must not be a personal hold- 
ing company, or a partnership which, if incorporated, would be a personal hold- 
ing company. 

2. Direct investor. — A qualifying direct investor should be defined as an in- 
dividual, a grantor trust of an individual, a decedent's estate, or a small busi- 
ness investment company, who owns, directly or by family attribution, 10 per- 
cent or more of the business enterprise. 



:\. Employee investor. — A qualifying employee Investor should be defined as an 
Individual, who would be eligible (except for minimum age) under ERISA rules 
to participate In a tax qualified retirement plan of the Investee business enter- 
prise, or a common control affiliated employer, if there were such a plan, and 
Irrespective of the size of the investment. 

i Ordinary Investment losses.— An ordinary loss deduction up to $150,000 
should l»e allowed to each direct or employee investor, for each of his taxable 
years, as to losses sustained by such Investor upon his capital investment in, 
direct loans to. or guaranty losses upon, a small business enterprise. 

.".. Additional current investment losses. Losses sustained by a direct or eni- 
ployee investor respecting ;i small business enterprise stock, loan, or guaranty, 
in excess of the $150,000 annual limitation, should be fully deductible in the year 
sustained, after first being reduced by a 50 percent adjustment. 

<;. Operative facts control,- The legal formalisms under the present section 
1244 small business Stock provisions should be eliminated. The ordinary loss al- 
lowance entitlement should be based upon the actual qualification of the firm 
.is a small business enterprise and the taxpayer as a direct investor or employee 
investor. 

7. Business loss. — Both the full 100 percent direct and employee investor loss 
deduction and the 50 percent adjusted additional direct and employee investor 
losses respecting a small business enterprise should be considered business losses, 
eligible for net operating loss carryback and carryover on the investor' in- 
dividual or fiduciary returns. 

8L Investment timing. — These loss deductions should be allowed for stock and 
loan investments and guaranties made or honored at any time during the incep- 
tion, operation, or termination of the small business enterprise. 

/>'. Disposition of a profitable enterprise 

1. Tax-deferred sale. — (Jain realized by a direct investor or employee investor 
upon the sale of an interest in a small business enterprise should not be recog- 
nized except to the extent that such investor does not acquire a qualified re- 
placement investment within 12 months before or 24 months after the sale of 
such interest. The adjusted basis of the investment should be reduced by the 
non-recognized gain. 

2. Qualified replacement investment, — An eligible replacement should include 
investment in another small business enterprise, or a small business rollover 
account (SBRA). The SBRA must be invested in voting stock of corporations 

(other than personal holding companies, regulated investment companies, or real 
estate investment trusts) and limited temporary cash holdings. 

.".. SBRA earnings and withdrawals. — The SBRA holder should be taxed cur- 
rently, as in the manner of a simple trust, upon the SBRA earnings, including 
capital gains. Withdrawals from the SBRA should be tax-exempt to the extent 
they are reinvested in a small business enterprise. Other withdrawals from the 
SBRA, to the extent they exceed the original basis to the SBRA holder and pre- 
viously taxed earnings, should be taxed as a long-term capital gain. 

!. collapsible asset exceptions. — These tax deferral (rollover) provisions 
should not apply to the gain realized upon the sale of collapsible corporation 
stock, or the ordinary income portion realized upon the sale or liquidation of a 
partnership interest. 

5. Personal service employer. — These tax deferral (rollover) provisions should 
not apply to any interest in a professional service employer. 

('». Dividend equivalents. — These tax deferral (rollover) provisions should not 
apply to any stock disposition or sale proceeds which would be considered equiva- 
lent to a dividend distribution. 

7. Basis of qualified replacement investment property. — The individual's (di- 
rect investor or employee investor) basis in the replacement small business enter- 
prise investment or SBRA should be the cost of this replacement property reduced 
by the untaxed gain on the sale of his business interest. 

8. Minimum tax. — The long-term capital gain deduction applicable to gain 
realized upon the sale of a small business enterprise interest, or SBRA with- 
drawal, should not be a tax preference item for the minimum tax. 

C. Family ownership continuity 

l. Death tax stock redemption. — The eligible redemption proceeds should be 
enlarged to include the capital gain tax payable upon the redemption of stock or 
an SBRA which constitutes carryover basis property, the stock ownership 
threshold should be decreased to include stoek constituting 25 percent of the 



decedent's adjusted gross estate, and the threshold for aggregation of plural 
corporations should be reduced to include corporations owned at least 25 percent 
in value by the decedent. 

2. Stock redemptions from fiduciary. — The termination of interest "safe har- 
bor" for a stock redemption should be expanded to permit cancellation of the 
stock ownership attribution rules, under the 10-year reacquisition notice proce- 
dure, for stock held by the decedent's estate or an intervivos or testamentary 
trust of the decedent. 

3. Estate tax installment payments. — The legal formalisms now required for 
installment payments should be repealed. Any estate tax reported on a return, or 
deficiency in estate tax, should be payable in equal annual installments over a 
period through a terminal year ending 15 years after the date of the decedent's 
death. This installment privilege should relate to the estate tax attributable to a 
small business enterprise interest by a direct investor or employee investor. 

D. Operation of a profitable business 

1. Simplified LIFO inventory. — The Internal Revenue Service or Department 
of Commerce should publish indexes to permit a simplified dollar value LIFO 
inventory computation by all business enterprises. Month-end index data should 
be provided to facilitate the computation of quantity increases in terms of 
the taxpayer's base year dollar investment, and should be usable by an elect- 
ing taxpayer for a taxable year ending up to six months after the month 
selected. 

2. LIFO elections. — The taxpayer's election to use the simplified government 
index should be irrevocable. A separate election should be provided to use 
the prior year-end index to price a quantity increase during the current taxable 
year. 

E. Capital formation for small business 

1. Employee retirement plan investments. — The present ERISA prudent 
fiduciary restrictions on employer investments should be liberalized by ad- 
ministrative interpretation or legislation to permit purchase of employer real 
property or employer stock in a small business enterprise. Furthermore, the 
former law permission of secured loans to an employer should be reinstated. 
However, no purchase of a partnership interest in the employer should be 
permitted. 

2. Participant consent. — Investments in employer real property, employer's 
stock, or secured loans to the employer, should be permitted from funds of 
an individual account plan (profitsharing or money purchase pension) from 
account balances held for a proprietor, partner, or (5 percent) shareholder 
employee. 

3. Fiduciary review procedure, — Investment in employer real property, stock, 
or secured loans should be permitted in other cases, i.e., defined benefit plan 
funds, or individual account balances for other participants, after review and 
approval of the investment by a fiduciary independent of the plan trustee 
and the employer. 

4. Employer real property. — The present requirements of multipurpose struc- 
ture and diversified geographic locations should be repealed, and a prudent 
businessman (not prudent fiduciary) standard substituted. 

5. Employer stock. — An employee retirement plan, other than an ESOP> 
should be entitled to invest up to one-half of its trust fund in employer stock, 
subject to the participant consent and independent fiduciary review procedures 
stated above. The prudent businessman standard should also apply to an 
investment in employer stock. 

6. Employer secured loans. — A prudent businessman rule should be provided 
in lieu of the old administrative rule of collateral value equal to at least 
200 percent of the loan balance. The Internal Revenue Service should publish 
a safe harbor interest rate range for employer loans, and these loans should 
provide for a changing interest rate to reflect the periodic IRS interest 
promulgations. 

II. PRESENT LAW TAX DISADVANTAGES 

A. Losses from unprofitable business operations 

Instances of tax disadvantages under present law. particularly for the small 
business compared to the large business enterprise, include the following: 

1. The filing of a voluntary bankruptcy petition by a shareholder in a 
Subchapter S corporation disqualifies the corporation's election, per Revenue 



Ruling 7 1 9. This disqualification will create hardships for all the share- 
holders it" they hare anticipated individual return deductions for the pass- 
through of corporation operating losses. Tims, the bankrupt shareholder is 
deprived of the Del operating loss deduction on his return, which might other- 
wise have been carried hack to obtain refunds of taxes paid in the preceding 

three years. , , , . ^ _ ,. 

•_'. The internal Revenue Service has also concluded, in Revenue Ruling <4- 
210. that no individual return h><s deduction could he claimed by a taxpayer 
upon his transfer of assets to the bankruptcy trustee. The ruling contains an 
example involving a taxpayer who delivered his real estate and investment 
stocks to the bankruptcy trustee after the corporale creditors had obtained 
judgment against the taxpayer as a corporate officer. The ruling followed the 
case of Hot er I. Martin, Jr., 56 T.C. 1204 (1971), where a deduction was 
: to the taxpayer, who turned over his proprietorship inventory to the 
bankruptcy trustee, reasoning that the trustee would report any gain or loss 
upon final disposition of the assets received. 

::. The Internal Revenue Service, supported by the courts, has pursued a legal- 
istic interpretation of the small business stock loss provisions in section 1244 
of the Internal Revenue Code. Thus, small business stock qualification, and the 
consequential ordinary loss deduction, have been denied where the stock plan 
was evidenced only in memoranda prepared by the corporation's accountant 
and attorney ; where the 2-year limitation on the plan was not expressly stated, 
even though the stock in fact was issued within the 2 years ; where the 2-year 
limit was specified only in the State corporation commissioner stock issue per- 
mit: where the stock was paid for before the plan adoption and stock issue: 
where the SD00.000 offer limit was not expressly stated; where the written plan 
did not contain an explicit reliance upon section 1244; and where the corporation 
conducted an active loan business (interest income disqualification). 

4. Perhaps most important, use of the small business stock loss provisions has 
been denied for funds invested by the stockholders in a financially embarrassed 
corporation in order to permit the corporation to repay corporate creditors, on 
the ground that Congress intended to confine this relief provision to newly 
organized businesses. 

5. Guaranty losses and direct loan bad debts are routinely treated as non- 
business bad debts, reportable as short-term capital losses, with only a $2,000 
is.",. 000 in 1978) deduction allowed from ordinary income. The courts reason 
that a guaranty should be treated in an identical fashion to a direct loan, and 
that a direct loan should be considered an investment with capital gain potential 
(by reference to the usually associated capital stock of the lender), and gen- 
erally find that loans are made for the purpose of reinforcing a stock invest- 
ment rather than for obtaining ordinary income, whether this income be interest 
on the note itself, or salary or rental income from the borrowing corporation. 

0. The effect of this interpretation is to restrict the deduction of a loss if the 
entrepreneur's guaranty or direct loan is unsuccessful, while requiring full 
ordinary income taxation of any interest income received on the direct loan 
or any premium received from the borrower for the entrepreneur's guaranty. 
Furthermore, the strict legalisms on the stock investment loss, and the failure 
to increase the $50,000 loss ceiling to reflect inflation since section 1244 was 
enacted in 1958, produces a full capital gain tax if the stock investment is 
successful, and frequently a nearly unusable capital loss if the stock invest- 
ment is unsuccessful. 

7. The Internal Revenue Service, both by ruling and by consolidated return 
regulations, approves the acquisition of profit businesses by a taxpayer which 
intends to utilize its net operating loss carryover against profitable operations 
of the acquired business. Generally speaking, only the larger loss corporation 
can survive long enough, and has sufficient working capital, to purchase the 
requisite profitable activities. The small loss corporation does not have the 
necessary time or resources, and, tinder both the present and the pending sec- 
tion 3*2 provisions, finds it difficult to locate a purchaser for its own loss 
carryover. 

8. The Internal Revenue Service and the courts have followed a strict rule 
of requiring capitalization of business investigation and pre-operating expenses. 
In the case of the small business, no deduction is allowed for a business 
investigation outlay where no business is acquired or commenced. If the busi- 
ness is commenced, capitalization is required, with no amortization deductions 
because a definite life is absent. This may be compared with a large business 
enterprise, which routinely is allowed ordinary deductions for studies and 
expenses involving expansion or diversification of existing activities. 



75 

B. Disposition of a profitable enterprise 

1. Under present law, the owner of a small business desiring to dispose of it 
at retirement or otherwise is faced with the fact that a sale for cash or notes, 
as would typically be the case in a sale to another entrepreneur, will result in 
immediate taxation of any gain realized on the sale. 'On the other hand, the 
taxpayer may cause his corporation to be acquired by a large publicly held 
corporation, in a transaction primarily or exclusively for stock of the public 
corporation, and obtain a deferral of taxation under the reorganization provi- 
sions of the Internal Revenue Code. While there are certainly economic differ- 
ences between the forms of consideration received in these different types of 
transactions, the tax law creates a bias in favor of the acquisition of privately 
held corporations by large conglomerates, thus encouraging the movement of 
small businesses out of the small business sector. Such acquisitions may result in 
changes in management approaches, locations of plants and offices, and location of 
personnel, and otherwise disrupt the acquired company. Small businesses provide 
approximately 52 percent of the private employment in the country, and dis- 
ruptions of employment and other relationships are significant both to those 
directly involved and to the surrounding communities. 

2. The minimum tax on "items of tax preference" was designed to insure that 
individuals who take advantage of various incentives in the Internal Revenue 
Code not be permitted by the aggregation of such incentives to completely avoid 
Federal income taxation. The gain on the sale of a small business is generally 
treated in whole or in part as capital gain. It appears, however, that the 
inclusion of all capital gains, including those arising from the sale of a small 
business owned for a long period of time, goes beyond the intent of Congress in 
enacting the minimum tax. 

3. The gain on the sale of a small business is often comprised to a substantial 
extent of inflated valuations because of the extremely long holding periods often 
involved in the ownership of such enterprises. 

C. Family ownership continuity 

In addition to the discriminatory tax treatment afforded losses in small 
business enterprises compared to those sustained by large business enterprises, 
and the inducement under present law for the entrepreneur to transfer his busi- 
ness to a large, publicly held company for its stock, related in A. and B. above, 
the present law creates unnecessary obstacles to continued ownership of a small 
business enterprise following the death of its founder. In addition, these diffi- 
culties have been increased by the 1976 Tax Reform Act. The particulars are as 
follows : 

1. The 1976 Tax Reform Act has made operation of many existing "buy-sell 
agreements'' more difficult, if not impossible. The carryover income tax basis 
rules for property acquired from a decedent produce a capital gain tax upon sale 
of the founder's stock, or partnership interest, by his estate, whether to the busi- 
ness enterprise or to the remaining principals. Congress, however, made no provi- 
sion to include such capital gain tax in the qualified proceeds entitled to the 
decedent's stock redemption Code section 303 provision. Further to aggravate 
matters, the Act generaly increased the stock ownership ratio required to qualify 
for the section 303 provision. In addition, the law makes it difficult for a dece- 
dent's estate to aggregate ownerships in several corporations by requiring that 
the decedent have owned more than 75 percent of the stock of each corporation 
involved. 

2. The present law provides capital gain tax treatment to the owner of stock in 
a closely held corporation who sells all of his stock back to the corporation. The 
selling stockholder, by filing a reacquisition notice agreement, can secure a waiver 
of the indirect ownership attribution rules so that ownership of other stock by his 
relatives can be disregarded in determining whether he has retired all his stock. 
There is considerable uncertainty as to whether a decedent's estate can sell all of 
his stock back to the corporation under similar circumstances. The Internal 
Revenue Service refuses to follow the Tax Court decision in this respect, and with 
the new carryover basis rules, the IRS position is that ordinary income taxation 
will apply on the corporation's redemption of the decedent's stock in these cases. 

3. Continuity of family ownership was often achieved under pre-1977 law 
through a systematic program of large stock or partnership interest gifts by the 
founder of the small business enterprise to his children and their spouses who had 
become active in the business. The 1976 Tax Reform Act, by requiring inclusion 
of post-1976 lifetime gifts in the estate tax computation, has, in effect, created 
a regime of prepaid estate taxes, and discouraged such gifts. 



76 
-i. Severe Inflationary trends In the economy, often stimulated by governmental 

action, Significantly increase tbe Impact Of estate taxes on closely held business 
interests held at death, and capital gains taxes on interests sold by the founder 
during his lifetime. The 1978 Tax Reform Act mitigated somewhat the inflation- 
ary effort through adoption of an extremely complicated special valuation system 
lor certain real property used in a farm or other business. These special valuation 
rules, however, do not reach the Inflation problem directly, and operate onlv 

where the capitalised earnings value is lower than property trading values. 

5. Under present regulations, the estate tax installment privilege is allowed foi 
a deficiency in estate tax. i.e.. one resulting from an increase for values in a 
closely held business acquired after IKS examination of the estate tax return, 
duly if the estate had made an actual or provisional installment election with the 
return. The Installment privilege is not allowed for a deficiency in the absence 
« I such an election, even though the business values as adjusted upon IKS exam- 
ination satisfy the threshold requirements of the Code. 

7). Op- ration of a pro/italic buslnc** 

1. A taxpayer may adopt the LIFO method of computing inventories, hut many 
small businesses fail to do so because of the complex record keeping requirements 
which attach to this election. Accordingly, they continue to recognize as part of 
taxable income elements of Inflation which the LIFO method is specifically de- 
Bigned to eliminate. Particularly onerous in using the dollar-value approach to 
UFO computations is the need to price the current inventory twice each year. 
The current inventory is to be priced both in terms of base prices and current 
prices in order to arrive at a percentage to be applied to the current year's in- 
ventory increment. 

2. The profitable small business corporation faces numerous other tax disad- 
vantages compared to the large business enterprise. These include the com- 
plexities of tiie ('lass Life Asset Depreciation Range System (which can be 
mastered by the la rue enterprise, thus achieving a 20 percent decrease in useful 
lives and 25 percent increase in allowable depreciation) ; IRS scrutiny of. and 
occasional imposition of penalties upon, earned surplus accumulations; IRS 
scrutiny of. and occasional disallowance of, officer/stockholder salaries: the 
numerous Subchapter S complexities and reporting pitfalls; the restrictions on 
investment credit for used assets: the inability to employ workable nonqualified 
slock option plans; and the IRS position that the controlled corporation group 
restrictions should apply to companies where otherwise unrelated stockholders 
do not meet both the '•control" and "financial" common ownership tests. 

III. DISCUSSION 

.1. L088C8 from mi profitable business operation* 

Tii.- Task Force considered recommendations for tax law changes in the bank- 
ruptcy, net operating loss carryover, and business investigation and pre-operating 
expense areas, but decided to omit all three areas, the first because of the com- 
prehensive review being made elsewhere for all bankruptcy provisions, the sec- 
ond because of the perceived political difficulties in securing recognition by the 
Administration and Congress that the present rules generally impinge upon 
small rather than large businesses, and the third because the Task Force be- 
lieves further study is required of definitional and administrative aspects. 

However, important improvements in the tax law should be feasible now. are 
recommended by the Task Force, and are discussed below, as follows: 

1. SiiKiil business enterprise. — The indispensable ingredient of all proposals 
involves the definition of a small business enterprise. The Task Force proposal 
defines the qualified enterprise as one more than 50 percent owned by its em- 
ployees, and/or significant (direct) investors, which conducts an active business 
operation. Furthermore, the business firm must not have offered securities to the 
public or made any filing with the SEC; i.e.. a publicly held enterprise is never 
considered to be a qualifying small business. 

2. Hind in rest or. — The overall theme of a small business should be one con- 
ducted and owned by full time employees or persons having a substantial finan- 
cial stake in the enterprise. Tin 1 purpose is to continue the American small 
business ideal of persons actively involved and interested in the formation, 
conduct, and continuity of the firm and its relations with employees, suppliers, 
customers, and the community. Accordingly, a qualifying direct investor should 
bo either an Individual, a revocable trust created by him. or his estate. Put 
another way. a corporation, or syndicate of investors, does not qualify, even 
though in the aggregate such combination owns more than 10 percent of the 



n 

enterprise. Furthermore, this ownership should he either actual or attributed 
to family relatives, i.e., without attribution through partnerships, fiduciaries, or 
other corporations. 

3. Employee investor. — The employee investor should he a person who devotes 
the preponderance of his time to conduct of the husiness. This ohjective is 
achieved by following the ERISA rules for eligibility, under the hypothesis that 
a tax qualified retirement plan is maintained by the enterprise. Thus, an em- 
ployee would he an eligible stockholder if he meets the one year of service and 
1,000 hours of compensated time rules. However, the 25-year minimum age 
ERISA rule should not be applied for this purpose. 

4. Ordinary investment losses. — The large business enterprise can deduct in 
full, as an ordinary expense, the loss sustained from an investment in an unsuc- 
cessful venture, whether conducted as a branch, division, or wholly owned 
subsidiary. The same full deduction should be allowed for investments in a 
qualifying small business enterprise. Even though a full deduction, regardless 
of dollar amount, can be claimed by a large enterprise, the Task Force proposes 
a $150,000 limitation for the full deduction allowable to each direct or employee 
investor. If revenue considerations permit, this ceiling should be eliminated in 
a subsequent law change. The ordinary deduction should be allowed for any 
unrecovered basis by the investor in his partnership interest, or corporation 
stock. The full deduction should also he allowed for bad debt losses upon direct 
loans to the partnership or corporation, and losses sustained when the investor 
honors guaranties made to other lenders to the partnership or corporation. 

5. Additional current investment losses. — Losses described in 4., but in excess 
of the $150,000 ceiling, should be allowed as a current deduction, subject to a 
50 percent adjustment, in a manner similar to a long-term capital gain. If the 
enterprise had been successful, and the investor realized a gain upon sale of his 
partnership interest or corporation stock, such gain would be fully taxable, sub- 
ject to a 50 percent adjustment. The same should be true of his losses when 
the enterprise is unsuccessful. 

6. Facts versus formalisms. — If the corporation or partnership in fact qualifies 
as a small business enterprise, the ordinary loss treatment should be allowed. 
No formalities such as written plans, election filings with the IRS, or sequential 
technicalities should apply. 

7. Business loss. — The loss sustained by the direct investor or employee in- 
vestor should qualify as a business loss, eligible for net operating loss carryback 
and carryover on the investor's returns, the same as the small business stock 
loss treatment under present law. The failure of a business enterprise in many 
cases will create losses for the investors in excess of their current year income, 
and this loss should be available over the carryback and carryover period as an 
operating loss. 

8. Loss timing. — Frequently investors are required to commit additional funds 
to the failing enterprise in order to meet legal or moral obligations to suppliers 
and other creditors. An ordinary deduction should be allowed for these "clean- 
up"' funds, just as they are allowed for the initial funds committed to form the 
enterprise. The present distinction imposed by IRS administrative interpretation 
for small business stock losses should be eliminated. 

B. Disposition of a profitable enterprise 

1. Tax deferral on the sale of a small business. — In appropriately limited cir- 
cumstances, the seller of a closely-held corporation should be permitted to rein- 
vest the proceeds from the sale or a small business in another small business and 
be permitted (a) non-recognition of gain on the sale with (b) a corresponding 
adjustment to the basis of the ownership interest in the new business to insure 
eventual recognition of the gain. This proposal is designed to yield substantially 
the same tax results as would have been accomplished had the business been a 
party to a tax-free reorganization. 

Since "small businesses" include both incorporated and unincorporated entities, 
the following conditions are to be applied in determining the applicability of 
the proposed nonrecognition provisions : 

(a) Generally, either a stock investment or a partnership interest, owned by 
a direct investor or an employee investor, qualifies. 

(b) If the husiness disposed of was incorporated, the non-recognition provi- 
sion does not apply : (i) to the extent that the stock was disposed of in a trans- 
action in which the proceeds would be considered equivalent to a dividend; and 
(U) if the corporation was "collapsible." 

40-2S7 — 79 6 



78 

[f the business interest disposed of was B partnership interest, the non- 

r i , .. i pro «fl not apply to so much of the gain as is described in 

Bection 751 of the Internal Revenue Oode. ™ T o * 

id i Dispositions of Interests In personal service employers, as defined in ERIbA 

4021(c)(2)(A) without regard to the existence of employees, do not 

qualify for non- I Ion, and 

neat of the proceeds in stock of a corporation which is a personal 
holding company or regulated investment company, or in an interest in a part- 
p which, If Incorporated, would be a personal holding company or regulated 
ipany, does ool qualify for non-recognition, and subsequent per- 
sonal holding company or regulated investment company status ( or corresponding 
"as it" status of a partnership) would be considered a opposition of the stock 
or pai interest. 

2. Tax preferences. — The long-term capital gain deduction applicable to gain 
realized upon the Bale <»:' a .-mall business enterprise should not be a tax prefer- 
ence item Cor purposes of the minimum tax. 

;;. Inflation adjustments.— After lengthy consideration, the Task Force makes 
qo specific recommendation with regard to adjustments to basis, graduated 
capital gains tax*--. <»r adjustments to the long-term capital gain deduction to 
compensate for the effect of inflation due to the substantial complexities which 
would i»o inherent in each of these often discussed alternatives. The discussion 
which follows, however, is intended to provide commentary regarding this major 
problem area. 

r. Family ownership continuity 

As mentioned above, the Task Force makes no current recommendations on 
inflation adjustments for the sale of a small business. The same complexities 
argue also for further study of such adjustments in the family ownership con- 
tinuity area. In addition, the Task Force recognizes that it is not politically 
feasible to recommend a repeal of the recently adopted "adjusted taxable gifts" 
(prepaid estate tax) provision. However, important changes can be made in the 
tax laws to encourage more family ownership continuity in the small business 
enterprise. These are discussed as follows : 

1. Death tax stock redemption. — The purpose of Congress in enacting section 
303, concerning redemptions of a decedent's stock, w T as to facilitate buy-sell 
agreements which make available funds of a closely-held corporation to a de- 
ceased stockholder's estate for estate settlement cost. Under present laws, the 
settlement costs which qualify for redemption proceeds include funeral and 
administration expenses and federal and state death taxes. Requirement of 
transfer of a decedent's carryover basis to the estate in many case will involve 
significant capital gain taxes for post-1976 estates upon the stock redemption. 
Pursuit of the Congressional logic inescapably requires that corporate funds 
also be made available to the estate for funding of these capital gain taxes. The 
qualifying proceeds amount should include such taxes. 

In a pre-1977 estate, the ownership threshold for a section 303 redemption 
typically was 25 percent of the decedent's adjusted gross estate. This ownership 
threshold was available when the business founder dies leaving a surviving 
spouse and providing a maximum marital deduction bequest to her. In addition, 
the specific exemption was considered in arriving at the threshold amount. 
Specifically, the 50 percent of taxable estate threshold reduced the qualifying 
ownership portion in the decedent's estate by the marital bequest (50 percent of 
adjusted gross estate after debts and expenses) and the $60,000 exemption. For 
post-1976 estates, the 50 percent of adjusted gross estate threshold more than 
doubles the ownership ratio required in the decedent's estate, i.e., the propor- 
tion of the corporation value to the total estate. 

The old law should be restored to permit continued feasibility of existing buv- 
sell agreements (formed in reliance upon the pre-1977 law)/ Furthermore, in 
order to provide the same threshold level in the contingency of the business 
founder's dying after his spouse, a flat 25 percent of adjusted gross estate 
threshold is proposed. This also avoids any complications with the substitution 
of the unified credit for the specific exemption. 

On occasion, sound business reasons dictate conduct of a business operation in 
multiple corporations. The tax disadvantages of operation have been eliminated 
by the controlled corporation group rules. Often, where multiple corporations 
are involved, the entrepreneur will join hands with other investors or key em- 
ployeos who will hold significant majority or minority interests in some or all 
or the corporations. 



79 

The present law, in determining the 50 percent of adjusted gross estate thresh- 
old, permits aggregation of the decedent's multiple corporation ownerships only, 
if each exceeds 75 percent of the corporation involved. In practice, this often 
makes fulfillment of the threshold, and eligibility for a corporate buy-sell agree- 
ment, impossible. The aggregation level should be reduced to no more than 25 
percent ownership by the decedent in each corporation. 

2. Stock redemptions from a fiduciary. — A business founder or entrepreneur 
can arrange for a redemption by his corporation of all stock directly owned by 
him, and qualify for capital gain treatment upon the resulting profit, even 
though his relatives own the remaining stock (provided such ownership was not 
created within ten years before such stock redemption for tax avoidance pur- 
poses). In order to achieve this treatment, the seller must file a reacquisition 
notice agreement covering the ensuing 10-year period. A counterpart provision 
should be added to clarify the entitlement of the decedent's estate (or a trust 
created by the decedent) to sell all of its stock back to the corporation where 
beneficiaries, or a trust or estate, hold other stock in the corporation. The law 
change proposed will overcome the uncertainty created by the Internal Revenue 
Service refusal to follow the case of Lillian M. Crawford, 59 T.C. 830 (1973) 
nonacq. 1974-2 C.B. 5. 

3. Differing estate tax installment payments rules are applied under present 
law for a 10-year estate tax installment payment plan and a 15-year plan (5-year 
tax payment moratorium and up to 10-year payment plan). In addition, under 
present regulations, installment payments are not permitted for a deficiency 
created by an increase in value for a closely -held business interest unless a 
provisional installment payment plan election was filed with the original estate 
tax return. In the case of any direct investor or employee investor, the estate tax 
should be automatically payable upon his partnership interest or corporation 
stock in the small business enterprise over the new law 15-year payment plan. 

D. Operation of a profiitaole business 

1. Presently, retailers operating department stores are afforded special treat- 
ment by being permitted to use indexes prepared by the Bureau of Labor 
Statistics in determining the LIFO inventory increment each year. Other tax- 
payers, however, are not provided with, nor generally permitted to use, such 
indexes. (See TIR-1342, January 27, 1975) In using the dollar value method 
of inventory, they are required to price the current inventory in terms of both 
base year and current prices, or to construct their own indexes. For many small 
businesses these are extremely complicated bookkeeping procedures, beyond 
the abilities of in-house accounting personnel. Accordingly, many small businesses 
which could avail themselves of the LIFO method fail to do so. 

2. Various published indexes might appropriately be used by taxpayers to 
price annual increments of inventory for dollar-value LIFO purposes. Alterna- 
tively, the Internal Revenue Service or the Department of Commerce might 
publish specific indexes applicable to particular industries. In any event, it is 
recommended that taxpayers be permitted to choose from the various indexes 
available whatever index they believe to be most appropriate for their businesses 
so long as the use of an index is elected irrevocably. It is contemplated, of 
course, that should the Service or the Department of Commerce subsequently 
publish a specific index for a taxpayer's industry, procedures would be initiated 
to permit a change to the more appropriate index. Furthermore, it is contemplated 
that the taxpayer would be allowed to use the prior year-end index to price 
a quantity increase during the current taxable year, as this approach would 
be roughly equivalent to using earliest costs during the year. 

3. Inability of the small business enterprise to use LIFO inventory accounting 
under the existing double extension complications aggravates the working capital 
needs of the business from income tax upon inflation in inventories. Often the 
business enterprise must borrow from the bank to replace the same quantity 
of inventory items which has been sold because taxes have been paid on the 
increased inventory replacement investment. 

4. The Task Force perceives a number of other areas which deserve legislative 
attention, including simplified depreciation, revision of the surplus accumula- 
tion tax rules, simplification of the used asset investment credit rules, addition 
of a practical nonqualified employee stock option procedure, and a more realistic 
definition of a brother-sister controlled group of corporations. 

Mr. Ciierkasky. I would like to touch on export problems and im- 
port problems of small business for a minute or two by Will Leonard, 



80 

former chairman of the International Trade Commission and now the 
Washington counsel for the Association of Independent Steel Distrib- 
utors. 

STATEMENT OF WILL E. LEONARD ON BEHALF OF THE ASSOCIA- 
TION OF STEEL DISTRIBUTORS 

.Mr. Leonard. I think that perhaps I could give yon a ease study of 
how a group of small businessmen become interested in public policies 
and governmental issues. The group is the Association of Steel Dis- 
tributors, and it is exactly what the name implies. The members dis- 
tribute steel products which they purchase, botli from domestic steel 
mills and from foreign steel mills, to a variety of customers here in the 
United States — contractors, automobile companies, other fabricators 
of products from steel, pipelines and others. 

They have had an organization for probably 30 years or more, and 
have had their regional meetings, their national conferences, and en- 
joyed the good cameraderie among t hemselves without a great deal of 
collective interest in what was going on in Washington an.d in the Fed- 
eral Government until the U.S. Government decided that something 
had to be done about imports of steel into the United States, and as a 
result came out with what is called the trigger price mechanism. 

That i> a means for attempting to stem the tide of steel imports into 
the United States. As a result of this being thought about and then be- 
ing put into effect by the U.S. Government, these small businessmen 
across the Nation, the Association of Steel Distributors, decided they 
had better do something about their contacts in and with Washington. 
They feared what would happen. They have now seen that this particu- 
lar formula or trigger price mechanism is doing them, they feel, great 
harm, and they even feel that it could bring about the demise of their 
organization because the TPM has not necessarily stemmed the tide of 
imports into the United States. Indeed, import levels are greater than 
t hey had l>een previously, but the problem for these steel distributors i- 
the means by which those imports are now coining into the United 
States. Rather than independent steel distributors getting their share 
of the distribution system of imported steel, as they do on domestic 
steel, they find that more and more the steel is coming into the United 
States through what are called related parties, that is. organizations 
in the United States that are owned or controlled by foreign steel mills, 
and indeed that was a problem, 1 guess, faced in former years to an ex- 
tent because of the distribution process of domestic steel mills. 

ka a result of their concern over the TPM, this organization has 
become interested in other things that Washington may be doing, or 
not doing. They formed within their organization a government 
relations committee. They hired me. They finally enunciated some 
positions on a broad range of governmental issues, and I would like to 
submit their recent policy statements to the committee. 

With respect to the international economic policy though that got 
them interested in Government doing something about steel import-, 
these small businessmen did not know what was transpiring, what 
was taking place, but the Government, in this case the Treasury De- 
partment, was given the responsibility by the President to come up 
with some sort of an import program to help the U.S. steel industry, 
and Treasury and the rest of the Government agencies, the Special 
Trade Representative's Office, the Department of State, the Depart- 



81 

ment of Commerce, and others, did not tune in, and probably bad 
never heard of the Association of Steel Distributors. So when these 
agencies decided to construct a program, they obviously consulted with 
the large steel mills, they obviously consulted with the representatives 
of the steelworkers, but they did not consult with the representatives 
of an integral part of the whole steel system in the United States, those 
folks who distribute steel products, and that unfortunately is con- 
tinuing to go on. 

TPM, as it is called, the trigger price mechanism, is promulgated 
and is in being, but in addition the Government decided to form a 
tripartite committee, a committee composed of Government people, 
of people representing labor and people representing industry. How- 
ever, thus far, and despite the intervention and. we feel, very helpful 
support of this committee, and of Senator Xelson. the administration 
has not seen fit to include among its membership on that tripartite 
committee someone representing the independent steel distributors. 

Likewise, another committee is being formed internationally under 
the auspices of the OECD, which will be called the International 
Steel Committee. The U.S. Government will be a member of that com- 
mittee and the U.S. Government is going to form an advisory group 
from the private sector to help it in enunciating its positions at the 
OECD International Steel Committee. We are hopeful that the inde- 
pendent steel distributor segment will be represented among those 
advisers to the U.S. delegation to that Steel Committee. 

This is one example of how small business became interested in 
Government. It is also one example of how the formerly esoteric con- 
cerns of international economic policy and international trade can get 
translated into a dollar and cents problem of immediate impact to 
small businessmen. 

So I guess what I am saying is that perhaps among their myriad 
concerns, the small business private and public communities should 
begin or perhaps continue to keep abreast of international economic 
developments, international trade developments in particular, and 
particularly as those developments are reflected by Federal Govern- 
ment actions or inactions. 

Thank you very much. 

Mr. Cherkaskt. Thanks. AVe will try again on behalf of the inde- 
pendents to get them on the board. 

[The supplemental information of Mr. Leonard follows :] 

Association of Steel Distributors, Inc., 

Cleveland, Ohio, October 30, 1978. 
Mr'. Dabwin B. Wilkof. 
President. Wilkof-Morris Steel Corp.. Canton. Ohio. 

Dear Dabwin: With regards to the U.S. Senate Small Business Committee 
Meeting- on Thursday. November 16, 1978, I have placed your name on the at- 
tendee list. You will represent ASD at this meeting. 

The Small Business Committee will be held from 9 :30 A.M. to 12 :30 P.M. in 
the Caucus Room (Room 318) of the Russell Senate Office Building. I suggest 
that you identify yourself to Bill Cherkasky and Herb Spira upon arrival. 

Enclosed is the information packet that was sent to my office. It outlines some 
subjects for discussion. 

If you require further information, please contact me at your convenience. If 
nor. 1 look forward to your report on the meeting. 
Cordially, 

Timothy F. Andrassy, 

Executive Director, 
Association of Steel Distributors. Inc. 
Enclosure. 



82 

Public Pouoibs on Which the Association of Steel Distributors Has Takes 
a Position, Bbtbcttve October 20, 1978 

i. tbiogeb pbice mechanism am) international trade ix steel 

.t. Summary 

Steel imports have increased, absolutely and as a share of the U.S. market. 
World steel capacity and production have grown faster than demand. U.S. steel 
producers have had reduced or non-existent profits and closed facilities winch 
therefore created significant unemployment U.S. steel producers cited imported 
steel, particularly at dumping prices, as a major cause of their problems. Thej 
Bled actions under the Antidumping Act and rallied the support of substantial 
numbers of Congressmen and Senators. The Carter Administration responded 
with a report from a Task Force headed by Undersecretary of Treasury Anthony 
Solomon recommending various ways to help the steel industry. The centerpiece 
Of the Solomon report was the Trigger Price Mechanism (TPMj, which created 
reference prices for a variety of imi>orted steel products based on Japanese 
costs of production plus transportation costs. Importation below a trigger price 
would possibly cause Treasury to institute antidumping proceedings. 

Other than the TPM, methods pursued by the Administration to make the U.S. 
steel industry healthier and more competitive with imports included government 
loans to revitalize domestic steel facilities or to help the communities and workers 
hurt by the closing of steel plants and pursuance of an international steel agree- 
ment to monitor the industry and trade developments and to consult on emerging 
problems. 

B. Position 

1. The TPM is not working. Imports have continued to increase although the 
sources of and distribution patterns for imports have been altered. Non-Japanese 
imports have increase^ and more foreign steel has entered the United States 
through importing and distributing outlets related to foreign producers and 
exporters. The TPM has had an inflationary effect, increasing prices on steel. 
Avoidance of the TPM is possible not only through the related party vehicle but 
also through the importation of fabricated products not covered by the TPM, 
which means more foreign value added to the detriment of U.S. companies and 
workers. As long as the TPM remains in effect, ASD will support the elimination 
of the abuses of TPM such as via the related party transaction and fabricated 
steel imports. 

2. Government and industry should use the various trade laws on the books 
to attack unfair trade. Supporting free trade does not mean endorsing unfair 
trade. ASD calls for strong government action against steel imported into the 
United States by unfair means — at less than fair value, by virtue of govern- 
ment bounties or grants, from countries which impose import restrictions on 
U.S. exports or which subsidize their exports. There are U.S. laws to prevent 
unfair trade. Domestic producers should avail themselves of these laws and 
the Federal Government should vigorously enforce them. For example, investi- 
gations should be instituted and quickly acted upon under antidumping and 
countervailing duty laws. Estimated dumping duties should be required to be 
deposited at the time of dumping findings. If the U.S. International Trade Com- 
mission finds unfair trade practices in its investigation of fabricated steel im- 
ports, the President should not interfere with the imposition of the remedy. 

3. The International Steel Committee should have teeth. The International 
Steel Committee should work to bring about more orderly trade in steel and 
reduce market disruptions, keeping in mind traditional trade patterns, and to 
open foreign markets to U.S. steel exports. It should be a committee with power 
to enforce its conclusions, not just to express pious hopes. To make sure the 
United States delegation to the Committee has the best information upon which 
to act. advisors from the private sector should be named and should include a 
representative of independent distributors, expressly the ASD. 

4. Taxpayer money should not be used in the hopeless task of trying to mod- 
ernize antiquated U.S. steel facilities. Government incentives should be pro- 
vided for new steel facilities which can compete with the latest facilities found 
in the steel industries of other countries and to help former steel employees and 
communities adjust to the shutdown of outdated steel plants. 



83 

H. INFLATION 

A. Summary 

Inflation is usually thought of as an increase in prices, most often measured 
by the Consumer Price Index. No attempt will be made here to give an extensive 
analysis of inflation to which libraries of books and articles are currently being 
devoted. However, a few general thoughts may be of interest. 

Inflation at what most people consider an unacceptable rate has persisted for 
about ten years. It is generally thought that what starts inflation are excess 
aggregate demand and a variety of supply shocks such as food shortages or an 
OPEC oil price boost. The rate of inflation as measured by the Consumer Price 
Index is again in the double digit range, that is, approaching ten percent for the 
first nine months of 1978. Methods of dealing with inflation include monetary 
policies such as tighter credit; fiscal policies such as higher taxes and lower 
spending ; wage and price controls ; wage and price guidelines and jawboning ; 
increasing conditions of competition such as through deregulation and more 
aggressive enforcement of antitrust laws; and a tax-based incomes policy pro- 
viding high and/or lower taxes to hold down prices. 

B. Position 

1. Obviously, it is like being for "God, country, and motherhood," not to men- 
tion "apple pie," for ASD to urge that the rate of inflation be reduced, if not 
eliminated. But it is more difficult to enunciate policies that should be followed 
or enacted to achieve the goal of reducing or eliminating inflation. xVlmost every 
recommendation for battling inflation has harmful direct or side effects. 

2. ASD, rather than taking on inflation as a separate public policy and pro- 
pounding recommendations on that public policy, will consider the inflation 
aspect in reaching its position on other public policies. In other words, the in- 
flationary effect will be one of the guidelines by which ASD evaluates an issue 
before taking a stand. Whether the issue is one of trade, tax, labor, or almost 
anything else, the alternative positions will have varying inflationary effects. 
Note will be taken on the inflationary effect of each alternative position in de- 
termining which is the best position for ASD. 

3. The President is about to issue his program to fight inflation. The Govern- 
ment Relations Committee may wish to take a stand on the President's pro- 
gram to fight inflation at a subsequent meeting. Therefore, a subcommittee of 
the Committee will analyze the President's program and make recommendations 
to the full Committee. 

III. PRODUCT LIABILITY 

A. Summary 

In recent years there has been an explosion of litigation in the product liability 
area. The result of the increasing number of cases and the large judgments 
awarded the plaintiffs in these cases has been a corresponding explosive increase 
in product liability insurance rates. Additionally, a growing number of companies 
have found that product liability insurance is unavailable at any price. The 
causes of the increase in product liability suits included relatively recent changes 
in tort law making it easier to pursue a successful suit against the distributor as 
well as the manufacturer of a product, the increasing cost of medical care, cer- 
tain insurance rate making practices, the manufacture of unsafe products and the 
relatively low level of state administered workers' compensation awards. 

Long-range proposals for alleviating, if not curing, the product liability problem 
include creating a uniform product liability law, providing new, higher worker 
compensation benefits, developing the appropriate Federal role in product liability 
insurance and making more effective state regulation of such insurance, promot- 
ing better manufacturing practices to provide safer products, and improving the 
coordination of accident compensation. But what has received the most attention 
in Congress and is of most immediate concern is what can be done in the short run 
by way of tax relief to reduce the difficulties faced by business because of the high 
rates of product liability insurance or the unavailability of such insurance at any 
cost. 

The House Small Business Committee and a number of trade associations, 
including the Small Business Legislative Council and the National Association of 
Wholesaler Distributors (ASD is a member of both), advocate legislation to allow 
companies to insure themselves against product liability risks by establishing a 
reserve fund exempt from taxation and to which payments would be tax deduct- 
ible. The sole purpose of the fund would be to pay the company's product liability 
claims and expenses. 



84 

The Other Bhort-term tax relief proposal Is that Of the Administration, which 
would extend the carryback period for net Operating losses attributable to prod- 
net liability and related costs from three to ten years. The Administration is 
against the so-called self-insurance idea because it would: permit a tax deferral 

and. therefore, he costly to the revenues of the government: allegedly result in a 
less favorable use of a business' capital: and supposedly he more difficult to 
administer. The extended carryback proposal of the Administration was added in 
the Senate to the tax cut hill: it survived the end of session conference between 
Bouse and Senate: and it thus is in the hill which President Carter will undou- 
btedly Sign into law soon. 

/:. Position 

1. The tw> t;ix relief measures are not mutually exclusive. The Administra- 
tion proposal to extend the loss carryback to ten years thereby allowing a small 
business facing a Liability claim to recoup that loss from refunds of previous 
years' taxes will become law. The self-insurance reserve proposal will probably 
lie re-introduced in the next Congress. ASI) supports it. As opposed to the ex- 
tended loss carryback provision, the self-insurance concept would resolve the 
problem of many businesses in obtaining any liability insurance at all and would 
help businesses to meet a large liability judgment out of a reserve that it would 
have on hand rather than from taxable profits of preceding years. 

2. ASD, through a Government Relations Committee subcommittee, will con- 
tinue to focus on the product liability problems and will be prepared to take posi* 
tions in the future on the longer range proposals that have been and will be made 
t" solve the problem. 

IV. LABOR LAW REFORM 

A. Summary 

The House of Representatives passed the Labor Reform Act of 1977. The Senate 
after lengthly debate and several efforts to stop a filibuster on the bill recommitted 
the bill to the Senate Human Resources Committee. That Committee worked on 
a revision of the original bill which it called the National Labor Relations Proce- 
dures and Remedies Act of 1978; but that bill was not passed by the Senate and 
therefore there was no so-called Labor Reform Bill sent to the President for sign- 
ing into law. However, this subject is likely to come up again during the next 
Congress. If stems from an effort on the part of organized labor as supported by 
the Administration to secure changes in the National Labor Relations Act. The 
Changes are designed to strengthen the enforcement provisions of the Act, ex- 
pedite procedures of the National Labor Relations Board, and in the eyes of 
organized labor bring more balance to labor-management relations. 

Provisions of the bills considered by this last Congress concerned expediting 
union representation elections, granting access to employer facilities for unions 
as well as employers to talk to employees, providing penalties for employers refus- 
ing to bargain, awarding hack pay to employees dismissed for union activity, 
barring companies from Federal government contracts or fining them for certain 
willful violations of the law, and empowering the National Labor Relations Board 
to enjoin employers for certain activities. 

The bill became a battleground for opposing points of view. Organized Ichor 
had the bill at the top of its 1978 legislative agenda and felt that it was necessary 
to get at certain unfair labor practices. On the other hand, business organizations 
including small business groups, such as the Small Business Legislative Council 
to which ASI) belongs, opposed the legislation vigorously. 

11. Position 

1. ASD supports any legitimate reforms of labor law which would truly add 
balance to the struggle between management and labor. But, ASD does not 
support the bills thus far presented to Congress because those so-called reforms 
appear to weigh too heavily in favor of unions and against small business. 

The rights of small businesses to communicate fairly to their employees the 
advantages and disadvantages of unionization and to manage legitimately their 
businesses even during an organizing campaign by the union should be protected. 

The bills offered thus far give unions an unfair advantage over small busi- 
nesses which have neither the time nor the expertise to walk the very thin 
compliance line proposed by the bills. Since the penalties for non-compliance 
are so severe, most small businesses confronted with a union organization drive 
will likely give up in advance rather than risk any action which might be 
cnnst rued later to have been illegal. This will result in unnecessarily increased 
costs which small businesses are least able to pass on to consumers and, of 



85 

course, projected further this means more small businesses going out of 

bl 2 in iTsimilar legislation comes before Congress again ASf^dX^S 
amendment to exempt small businesses Such an amendment would alio* the 
exempted small businesses to continue to operate under the present law. 

V. INCREASING EXPORTS 

A. Summary 

The large trade deficits the United States has experienced in recent years 
have weakened the value of the dollar, intensified inflationary Pressor** to out 
own economy and heightened instability in the world economy These trade 
deficits have been caused by a number of factors, one of which is the relatively 
slow growth of American exports. U.S. exports have grown at a rate much less 
than that of other industrial nations. This is part of the reason why the Lnited 
States has lost its share of world markets. Both business and government in the 
United States have accorded exports a relatively low priority. This has been due 
in part to the traditional self-sufficiency of the U.S. economy where production 
was geared to internal consumption and where in most sectors there was little 
need to export or to import. Because of the increased interdependence of the 
world economy and the shrinking of the world brought about by rapid trans- 
portation and' instantaneous communication, the situation is changed. It is be- 
coming extremelv important to the economic health of the United States to 
raise the level of our exports. To do that in part means to raise the level of con- 
sciousness of the public and private sectors toward exports. 

Last month the President announced certain measures intended to provide 
new Government incentives and remove existing Government disincentives to 
exporting and to secure a fairer international trading system for U.S. exporters. 
The Administration's program to improve U.S. export performance includes the 
following : 

1. The Export-Import Bank's loan authorization is increased and the Bank 
is to be more accessible to smaller exporters. 

2. The Small Business Administration will direct loan guarantees to small 
business exporters. 

3. The Departments of Commerce and State will expand their assistance of 
U.S. firms, particularly small and medium sized ones, in marketing abroad. 

4. The Domestic International Sales Corporation (DISC) is retained (because 
Congress has refused to eliminate it) but an effort will be made to make it 
simpler, less costly, and more effective. 

5. Export consequences will be considered in making government regulations 
and in deciding upon the use of export controls, 

6. The Department of Justice will advise business on what is and is not per- 
mittee! under the foreign antibribery statute. 

7. Justice and Commerce will explain how American firms can export under 
cooperative arrangements and in joint ventures without violating antitrust 
laws. 

8. An Executive Order will be issued clarifying and easing environmental re- 
quirements with respect to exports. 

9. The United States will press at the MTN in Geneva and in an expansion of 
the international arrangement on export credits for the reduction of foreign 
trade barriers to U.S. exports and of foreign government subsidies on their ex- 
ports to the United States. 

B. Position. 

1. ASD supports the Administration's program for expanding U.S. exports. 
Except that some provisions of the program will require additional funds, the 
proposals do not appear detrimental to U.S. citizens in general, to ASD members 
in particular. 

2. Further, ASD encourages its members to investigate the possibilities of 
entering the export business themselves. Expanded markets, via exports, can im- 
prove members' profit pictures. A Government Relations Committee subcom- 
mittee will be created to investigate the possibilities for exporting the kinds of 
products ASD members handle. If there is a potential for ASD members to ex- 
port and particularly if that potential is limited by conditions which government 
can alleviate, the subcommittee will recommend how best to maximize govern- 
ment assistance in the export effort The subcommittee will, for example, de- 
termine whether a Webb-Pomerene export cartel is possible and feasible for ASD 
members. 



86 

VI. PRODU< UlliV IX THE UNITED MATES 

I. Summary 

Productivity is a measure of what you gel out for what you put in. Increased 
productivity is a Larger output of goods and Bervices from the same input of 
labor, capital, and energy. Another way to say it is. to improve productivity. 

there lias to be a continuing ability to produce more in less time and with fewer 
resources. 

Productivity increases could mean to the United states a higher standard of 
Living, economic growth, control of Inflation, international competitiveness 
more Leisure and better health. Conversely, stagnant or declining productivity 

means Living standards fall, taxes rise, prices soar, jobs decline, and conceivably 
the entire American way of life, including its institutions, crumbles. 

What has happened to U.S. productivity lately is discouraging. As measured by 
output per hour, productivity increased at an average annual rate of 1.6 percent 
from MJ67 to 11)77. which was half the annual rate of 3.2 percent experienced 
between 1947 and 1907. If national productivity over the past ten years had in- 
creased at thai same ."1.2 percent rate of the previous two decades, it would have 
meant an additional $100 billion in terms of real gross national product at the 
1 1 » 7 7 employment level. The United States had tin* lowest average annual rate 
of change Ln manufacturing productivity among six major industrialized nations 
over the period 19(j7 to 1977 (2.3 percent compared to Japan's 6.8 percent). 

The decline in the rate of growth of productivity in the United States has been 
attributed to a number of factors including a changing age and sex composition 
of the labor force with a trend toward less experienced workers, a slowdown in 
the rate of growth in the capital/labor ratio, a leveling off of research and de- 
velopment expenditures, government regulations, particularly for health, safety 
and environment, changes in workers' attitudes, and a decline in the shifting of 
output and workers from low-productivity to high-productivity sectors. 

In 1975 the National Center for Productivity and Quality of Working Life 
was established within the Federal government to serve as a focal point for 
productivity improvement efforts. That agency folded this year because the gov- 
ernment decided that as it was presently funded, organized and supported, the 
Center could not do the job that should be done. The Administration has ap- 
parently decided that the functions of the Center should better be assigned to 
existing agencies of the government. 

B. Position 

1. ASD supports some government mechanism to replace the National Center 
for Productivity and Quality of Working Life. That mechanism could be the use 
of existing agencies — we don't necessarily need any additions to the bureauc- 
racy — but the important thing is to see that productivity is not put on the 
government's back burner but rather that it is given prominence and importance. 

Although the profit motive and competition in free markets should serve as a 
stimulus to economic progress and productivity grow T th, the government plays 
an important role in setting the framework for private enterprise through such 
areas as economic policies, tax laws, regulations and funds expended to support 
productivity advances. The government can aid productivity improvement by 
accelerating technological innovation; stimulating capital investment, for ex- 
ample, through tax policies; reforming the regulatory process; and enhancing 
this country's valuable human resources by acting as a catalyst in bringing to- 
gether labor and management for the improvement of work conditions. 

2. A Government Relations Committee subcommittee will follow efforts being 
made by irovernment and in the private sector to increase productivity and will 
disseminate such information to the membership of ASD. For example, there is 
a nonprofit American Productivity Center at Houston headed by C. Jackson 
Grayson, Jr.. former head of the Price Control Commission. It may be appro- 
priate for Grayson to address an ASD function. Productivity is not at present a 
glamour issues before the American public. Yet. it is an issue that must be 
irrasi>od by those in leadership positions in government, business and labor if 
the Hnited States is to prosper. ASD can be in the forefront in bringing this issue 
to the attention not only of our members but also of the American public. 



87 

[From the Post-Gazette, Nov. 15, 1978] 

Mellon, PNB to Cut Rates for Small Business Loans 

(By Jack Markowitz) 

Mellon Bank beginning tomorrow will shave 1*4 percent from its base loan rate 
for small businesses for the duration of the high-interest crunch, and Pittsburgh 
National Bank says it will "meet the competition." 

The two major Pittsburgh lenders thus appear to be taking a stand ahead of 
the banking industry generally in recognizing a particular squeeze on small busi- 
ness firms when interest rates push to historically high levels as they have in 
recent weeks. 

Both Mellon and Pittsburgh National, like most major commercial banks in 
the U.S., charge 10% percent as their prime rate on loans to top-rated corporate 
borrowers, though First National of Chicago's move to 11 percent on Monday is 
widely expected to be followed before week's end. 

The new Mellon program was announced yesterday at a press conference (by 
Board Chairman James H. Higgins, who said that small businesses are being 
squeezed not only by the higher cost of financing working capital, inventory and 
capital equipment but by the "heavy burden of government regulation." 

Under the Mellon program, effective tomorrow, a small business — defined as 
one with assets no larger than $1.5 million — will have its rate on a new or re- 
newed loan keyed to a new small business base iy+ percent below prime rate, 
but not below 9% percent. As the prime rate rises, the small business rate also 
will rise in tandem, maintaining the 1% percent differential. When the prime de- 
clines below 10% percent — and Higgins offered no prediction when that might 
be — the differential will narrow until prime reaches 9% percent. At that point, 
the program will terminate. 

Higgins and Craig G. Ford, senior vice president in charge of Mellon's metro- 
politan department, said the new program will affect only "a very small per- 
centage" of the big bank's $5.4 billion total loan portfolio but is especially de- 
signed to help tide small businesses over what Higgins termed "our inflationary 
age." 

The program affects new loans and renewal loans and is available only in the 
six-county area served by Mellon's 108 offices. 

Edward V. Randall, Jr.. senior vice president of community banking at Pitts- 
burgh National Bank, told a caller. "We will meet our competition." He said 
that a similar program will be explained to PNB's small business customers 
and that it also will take effect tomorrow, but he said there would be no public 
announcement of details. "It will be a more flexible plan." he said, indicating, 
however, that it would also involve a differential below prime rate. 

"We'll take anything we can get," Higgins said with a grin when asked if 
the program should spur new business, but Ford said the primary aim is to 
serve the customers who have dealt with the bank "through good times and bad." 

An Equibank spokesman said that the city's third largest commercial bank 
has not adopted what it called a "dual prime rate" for small and large business 
customers but plans to continue to set rates "according to the specific need^ and 
requirements of our borrowers." Equibank has "traditionally supported the 
small business community in our market area and will continue to do so." the 
spokesman said. 

Mellon's Craig Ford said small businesses typically have no choice but to 
borrow, especially at this season of inventory-'building in advance of the Christ- 
mas shopping season. The average small business loan i* S40.000. "We're hoping 
to help them cope not only with the high rates but the rapidity with which they 
have risen." said Ford. 

Up added that the bank has seen "no slowing of economic activity in the Pitts- 
burgh area — and we're hoping to keep it that way." 

His-Jiins said the new small business rate is the first, so far as he knows, to 
be established by a bank in the current spate of rising interest rates, but t^e 
Federal Reserve ordered all banks to take similar action in a previous credit 
crunch in 1973. 

If the Federal Reserve holds firm on its current course of restraining the 
growth of the money sunply. Higgins said, "interest rates mav go e^en higher 
and the degree of hardship in the small business community would simply 



88 

Increase." He declined to predict when rates will bit their x>eak. hut said thai 
orach depends on the actions <>r foreign holders of dollars. "They have got to be 
convinced of the credibility of the U.S. fight against inflation," said Higgins, 
who termed the Carter administ rat ion's moves so far "commendahle hut too 
little and too late.'' 

He said that small business loans should eontinue to he "profitable" for the 
hank. Many small businesses pay 1 to .'{ percent above prime rate now ami 
even with a rate differential will eontinue. in fact, to pay more than prime for 
borowed money. A small business customer now borrowing at 3 percent above 
prime would pay on a new or renewed loan beginning Thursday, the new small 
business rate pln< .". percent. 

Firmly scotching a reporter's inference that the new program puts Mellon 
in the position of seeking "higher-risk" credits. Ford said some small businesses 
possess a balance sheet whose ratios would he envied by some of the country's 
leading corporations. "But if we don't take care of them at a time like this," 
he said, "they've got a problem - ." 

The hank is making no adjustment to its consumer loan rates, which Ford 
said have held, unhudidng. at Pennsylvania usury law ceilings for as long as 
Hi years. Thus, a 48-month car loan remains at approximately 11 percent: a 
36-month personal installment loan at about 13.5 percent, and a home improve- 
ment loan at about 12 i>ercent. A 9*4 to 9% percent range was cited for conven- 
tional home mortgages, and Ford said that in all these consumer areas, loans 
are actively being made. 

Mr. Cherkasky. Yes, sir? 

STATEMENT OF JULIUS DAVIDSON ON BEHALF OF THE SERVICE 
CORPORATION OF RETIRED EXECUTIVES 

Mr. Davidson. My name is Julius Davidson, representing the Serv- 
ice Corporation of Retired Executives, known as SCORE. 

The SCORE organization now lias filed a brief supporting many 
of the positions taken this morning, and it has been submitted for the 
record, 

My eomments will be limited to just one item, and that is the "White 
House conference. 

Those who are involved in the regional, State, and loeal meetings. 
I want to remind them that SCORE is a nationwide organization 
eonsisting of 342 chapters located in every State in the Union and in 
Puerto Rico. Call on them for help. 

SCORE enthusiastically supports the White House conference. As 
a matter of fact, I think that it would be highly advisable to have a 
representative of SCORE on the Advisory Council to the White 
House conference itself. I think that is of the greatest importance. 

SCORE, I would remind you, has only one purpose, and that is 
its dedication to the overall welfare of the small business community. 
Call on it. 

Thank you. 

Mi-. Cherkaskt. Thank you, Mr. Davidson. 

[The supplemental information of Mr. Davidson follows:] 

Service Corps of Retired Executives, 

National Score Council, 

November 10, 1978. 
lion. (Iavlord Nelson, 
U.8. South-, Senate Office Building, Washington, B.C. 

Dear Senator Nelson: Thank you for your letter inviting small business 
organizations to meet with the Committee staff at 9 :30 a.m. on Thursday, Novem- 
ber 16. 197$, to advise tbe Committee of our views as to what your program 
might include for the two years of the 9Gth Congress. 



89 

Due to the inability of Joseph G. E. Knight, President of the Service Corps 
of the Retired Executive Association to attend the meeting, Mr. Julius David- 
son, Chairman, Budget Committee, National SCORE Council, will accompany 
me to present the views of the National SCORE Council at the meeting. 
Enclosed ar 20 copies of Mr. Knight's statement. 
Sincerely, 

Walter P. O'Rourke, 
Chairman, XSC Legislative Affairs Committee. 

My name is Walter P. O'Rourke and I am the General Counsel of the Service 
Corps of Retired Executives Association perhaps better known by the acronym 
SCORE. With me is Mr. Julius Davidson, Chairman Budget Committee, National 
SCORE Council. We are privileged to be able to appear before this committee 
and to have the opportunity of presenting the views of the National SCORE 
Council, the governing body of SCORE. 

Much of the legislation that has been prepared for review by this body is 
strongly supported by SCORE ; however, there are some areas in which we 
believe some other thought or additional viewpoints should be considered as 
well as some ideas that were not included in the Government Affairs Update 

SPUt US. 

We are still very concerned about the refusal of banks all over the country 
to entertain applications for loans under 10 thousand dollars on the grounds 
that the handling is too costly, and the problems to great. This causes us special 
concern when one realizes that the Small Business Administration is charged 
with and constantly striving to improve the entrance of women into the business 
community. 

AVe have on several occasions in the past months been sharply reminded in 
the process of workshops for Women Going into Business, that women are being 
denied their chance because funds in such small amounts are being refused by 
banks. 

It seems highly illogical to us to enter upon a national program to encourage 
women on the one hand to enter the mainstream of business and on the other 
fail to provide adequate funds to make that possible. 

SCORE has on several occasions now, suggested that since there is a dearth 
of direct money available through present legislation to women who plan to 
start a truly small business, that it is imperative that ways and means be found 
to make it both profitable and attractive to banks to make these small loans, 
and that the banking industry be the main source of such funds rather than a 
Federal direct money approach which invariably overlooks the geographic loca- 
tion of women in favor of the total population of a state, the basis which for 
example makes direct money to Rhode Island much less available than it does 
to California, thus denying the Rhode Island women and women of equally 
small states their chance as opposed to their chance if they are residing in a 
populatively larger state. 

In connection with any loan program in which SBA is involved, we feel very 
strongly a requirement that all such small loans for owners-to-be require the 
taking and completion of a pre-business workshop in order to fully expose these 
entrepreneurs to the potential hazards prior to any expenditures for a new busi- 
ness by anybody. A pre-business workshop is generally a full day session in which 
owners to be and recent owners are provided with the basic principles of good 
management. There have been far too many business failures that could have 
been prevented had there been such a requirement in the past. 

On the subject of the Small Business Development Centers, SCORE has sup- 
ported the concept as originally outlined to us some years ago when the idea was 
first introduced. Unfortunately there has not always been the execution of the 
original idea along the lines which included SCORE as an integral part of the 
plan. 

We are aware that the bill which would have furthered this project has been 
vetoed by the President, and that plans are afoot for the presentation of another 
bill in the spring that may overcome the objections stated. We in SCORE do 
strongly recommend that there be an advancement of the Small Business Devel- 
opment Centers, but not along the lines of current thinking. 

In the matter of Senator Lugar's amendment to the bill S. 1010 in which he 
suggests that there be a 13 member Bank Board, we feel that the suggested 
membership does not fully or adequately represent Small Business and that a 
member of the National SCORE Council should be one of the appointees to that 
Board so that all small business interests may be fully represented. 



90 

Ir became very clear al the Region One White House Conference on Small 
Business held as a prelude to the eventual White House Conference in 1980 that 
there needs to be a re-definition of the size of standards of small business and 

thai this should l.o a matter of committee study and report long before the actual 
Washington Conference takes place. 

There are Inherent problems In the Equal Employment Opportunity Act that 
have already produced some "backlash" effects. 

For example, the Carrol] County Independent, a weekly New Hampshire paper, 
QOl Long ago bad a sub headline that asked. "Where do we lind an Eskimo?". 
On reading the body Of the text it was noted that a small New Hampshire com- 
munity had in Borne way become involved in Federal funding, and as a require- 
ment bad to provide 10 percent of the labor to minorities. 

In this community, and in fact in much of the county, there are no minorities 
as denned by Federal regulations*, and as a result they were humorously inquiring 
as to where they could find and import for the purposes of the law some minority 
Buch as an Eskimo, keeping in mind no doubt that in that part of the country 
only an Eskimo could or would be able to stand importation to such a cold 
climate. 

set >RE recommends that there be those alterations in the regulations as would 
no longer prevent a community from benefitting by Federal funding simply 
because there have been no minorities in that community. It seems patently 
unfair that the good citizens of such a community should be denied their fair 
share simply because of the types of population or ethnic background they enjoy. 

s< < )RE strongly supports the elevation of the Administrator of the Small Busi- 
ness Administration to the Executive Level One, and hopes that serious consid- 
eration will be given to that move. 

Lastly, the problems that are being encountered by small manufacturers who 
are subject to the Product Liability laws are of sufficient severity as to suggest 
that a very hard look and swift revision is required in order to prevent those 
businesses from facing enormous increases in premium cost as well as the threat 
of and actual cancellation of policies such as w T ere described by a machinery 
manufacturer in Connecticut who is faced with either becoming completely tin- 
competitive because of the increased insurance cost or going out of business, 
and this after being in business for over 40 years (this was a public statement 
at the Boston White House Small Business Conference and is contained in the 
record of that meeting). The constraints imposed by these insurance regulations 
are in danger of becoming the death knell for small business owners, with 
resultant loss of employment and potential increase in imports, as foreign trade 
without the insurance requirements can quickly become the source for our lost 
business in a market that does not recognize the problems but is painfully 
aware of the price. 

In closing it must be made clear that the statements made here are those of 
the National SCORE Council on behalf of SCORE nationally and have been 
neither approved nor disapproved by the Small Business Administration although 
a copy has been given to the agency. 

Joseph G. E. Knight, 
Chairman, National SCORE Council. 

Mr. Ciierkasky. Yes, sir ? 

STATEMENT OF STEVEN A. WOLF ON BEHALF OF THE NATIONAL 
FAMILY BUSINESS COUNCIL 

Mr. Wolf. I am Steve Wolf, government affairs chairman of the 
National Family Business Council. This is a group of men and women 
working to perpetuate their family businesses. 

We like to look upon ourselves as a professional society of en- 
trepreneurs. The purpose of the National Family Business Council is 
to insure the survival of those working in family businesses and the 
survival of family business within our free enterprise system. It is 
our belief that the family business is important to the survival of the 
free enterprise system. 

The areas of concern of family business are its perpetuation in our 
generation and generations to come. The other area is the perpetuation 



91 

of the small private business sector within our economy and the 
perpetuation of the free enterprise system. 

The areas that we think should be investigated is the role that these 
family businesses play in the small business sector. If you perpetuate 
family business, you will have saved the small business sector, we 
believe, because over 99 percent of the small businesses are closely 
held. If one-half of all the family businesses close or sell out in one 
generation, then the small business sector will suffer. 

The other area that we think is of prime importance is the attitude 
of Government toward this sector. 

With a posith^e attitude by Government toward the small private 
business sector in the areas of capital formation, capital preservation, 
relief from Government regulations for small business, plus all the 
issues that the National Small Business Association or Small Business 
Legislative Council are in favor of in the White House Conference for 
Small Business — that would also help perpetuate the small business 
sector. 

Also the ease of restrictions in Government procurement for small 
business would help. The issue that we are most interested in is the 
estate and gift tax law T s and the effects those laws have on the family 
business. We think the current estate and tax laws are no longer rele- 
vant because of the increasing rate of inflation from year to year. 

By the year 1981, $175,000 exemption will probably cover most of 
our fathers homes, and that is about it. We also feel there should be a 
differentiation between the personal and business assets in one's estates. 
There should be more help for the heir of the family business as there 
is for the surviving spouse. More help in this area would help. 

Many family businesses are unfortunately uniquely penalized be- 
cause they must use their working capital to fund the payment of these 
estate taxes. The current laws also are something that should be looked 
into because of their inflationary force that they have upon the small 
business sector and family businesses within that sector. 

The suggestions that the National Family Business Council would 
like to propose are, one, to support and assist in the efforts of the 
White House Conference on Small Business ; two, to help maintain the 
free enterprise system by keeping the entrepreneurial spirit alive in 
generations to come; three, we specifically plan by 1980 to complete 
a study and make specific recommendations to you for the creation of 
a National Family Business Act. 

Family business is an integral and vital component of our economv 
and society. It is worth saving as a source of entrepreneurial talent. It 
is a means of insuring individuality, a personal sense of freedom and 
pride and ownership. Those are values on which this country tradi- 
tionally placed a premium. 

Family businesses serve as a means of holding together the family 
unit, which is the vanguard of stability, moral fiber, and providing for 
incentives and keeping things moving forward. 

One other thing that came up last weekend was a catchy saying that 
we kind of borrowed from someone's advertising campaign, but it kind 
of gives you an indication of how we feel all family business fits in, 
and we look on it as baseball, hot dogs, apple pie. and family business. 

Thank you for this opportunity. 

Mr. Cttkrkasky. Thank you. 



92 

[The supplemental information of Mr. Wolf follows:] 
Outline of Presentation 

BY 

The National Family Business Council 

Before 

Senate Select Committee on Small Business 

Holding Meetings on 

Small Business Program for the 96th Congress 

November 16, 1978 

i. introduction 

A. Brief explanation of who the National Family Business Council (N.F.B.C.) 
is 1. A group of young men and women working to perpetuate their Family 
Businesses; 2. Chief Executive Officers of closely -held businesses; and 3. A pro- 
fessional society of entrepreneurs. 

B. The Purpose of N.F.B.C. is 1. To insure the survival of individuals working in 
family businesses, and 2. The survival of Family Businesses working within our 
free enterprise system. 

II. AREAS OF CONCERN FOR FAMILY BUSINESS 

A. The perpetuation of our Family Businesses in our generation and the gen- 
erations to come. 

B. The perpetuation of the small private business sector of our economy. 
( \ The perpetuation of the free enterprise system. 

III. AREAS TO BE INVESTIGATED 

\ The role family businesses play in the small business sector. 

1. If you save and perpetuate Family Business, you will save the small busi- 
ness sector because over 99% of small businesses are closely held. 

2. If one-half of all family businesses last only one generation and either have 
to sell out or close their doors; then the small business sector will suffer. 

B. The continuation of the free enterprise system through positive government 
artit udes toward the small private business sector. 

1. Positive government attitudes toward capital formation. 

2. Positive government attitudes toward capital preservation. 

3. Relief from government regulations for small businesses. 

4. Ease the restrictions in government procurement for small business. 

•*». Review the current estate and gift tax laws and their effect on the perpetua- 
tion of Family Businesses. 

a. The current estate and gift tax laws are no longer pertinent because of 
changed economic conditions and the inflationary increase in the consumer 
price index. 

b. There should be a differentiation between personal and business assets of 
one's estate. 

c. There should be as much help for the heirs of a family business as there 
is for the surviving spouse. 

d. Family businesses are uniquely penalized because they must use working 
capital to fund the payment of estate taxes. 

e. The current laws are inflationary because they force small businesses to 
pass on these costs to the consumer. 

IV. N.F.B.C. PROPOSED ACTION 

A. To support and assist in the efforts of the White House Conference on Small 
Business. 

B. To help maintain our free enterprise system by keeping the entrepreneurial 
spirit alive. 



93 

C. By January, 1980, we plan to complete our study and make specific recom- 
mendations toward the creation of the National Family Business Act. 

V. SUMMARY 

Family business is an integral and vital component of our economy and society. 
It is worth preserving as a source of entrepreneurial opportunity, for the many 
contributions family firms have made in all fields of technology, innovation and 
social betterment. It is a means of insuring individuality, a personal sense of 
freedom and pride in ownership — all values on which this country has tradi- 
tionally placed a premium. Additionally, family business serves as a means for 
holding together the family unit, a sociological phenomena generally considered 
as being the vanguard for stability, moral fiber, and for providing the incentive to 
keep moving forward. . . . 

Mr. Cherkasky. We did not take a break this morning, so we are 
going to lock up the doors at 12 noon. 
Are there further comments ? 
Please, back here \ 

STATEMENT OF JACK GROLLMAN, ASSOCIATION OF INDEPENDENT 
CORRUGATED CONVERTERS 

Mr. Grollmax. I am Jack Grollman of the AICC. 

So as not to have any sense of complacency, I will dispense with 
further comment to the committee on the work it has done. I would 
like to concentrate on one subject. We would like to see an increase 
in the amount the Government presently allows for tax investment 
credit with respect to purchase of used machinery. 

At the present time, this maximum amount is $100,000. "We would 
like to see this increased to a limitless amount — the same as for new 
equipment. 

I suppose I should say our interest is typical of many other indus- 
tries in this country, small manufacturing industries, being machinery 
intensive, but rather minimal in labor. Even being minimal in labor, 
our average company, of which there are 750 in this country, employs 
about 50 employees per company. 

The equipment we use, the equipment to manufacture our product, 
is quite expensive. In the fields in which we are engaged, we must 
compete with the largest corporations of this type in the country. 

There are major integrated companies who control forest lands as 
well as the finished products. The area in which we compete is finished 
products — boxes. 

In order to produce such a finished product, we must have equip- 
ment that is quite expensive. By "quite expensive.'' the minimal type 
of new equipment today will rim into moderate six figures. 

It is not uncommon for small companies to purchase well in excess 
of $100,000 worth of used equipment each year. We are competing 
against the giant companies who do not normally buy used equipment. 
They buy new equipment for the manufacture of corrugated cartons. 

A modern high-speed corrugator today is close to a £2 million cost 
^ n vailed. 

A used piece of equipment comparable to a new one is in the range 
of P°.50.ono to $500,000. This is quite common. 

An ordinary press used to manufacture the shipping container is 
in the range of $500,000 new. This is a vital piece of equipment, and 

40-287—96 7 



94 
in its used form, the same piece of equipment can cost $150,000 to 

J MM). 

If we must compete in a very vigorous marketplace, we feel we 
should )>e allowed greater tax credit for the purchase of used equip- 
ment. 

The machine products industry and others al>o have parallel situa- 
tions. Food processors have the same situation. I believe a very wide 
segment of small business would be represented. We are talking about 
small business in the area of $1 million to $25 million in sales per year. 

I feel if this tax inducement is given to small business for credit 
on purchase of used equipment, it would help to perpetuate small busi- 
ness and as such provide many jobs to the economy. 

Mr. Cherkaskt. Thank you. 

Mr.Feilar? 

STATEMENT OF FRANK FEILAR, DIRECTOR, ACTION PROGRAMS 
AND ADMINISTRATION, NATIONAL RESTAURANT ASSOCIATION 

Mr. Feelar. My name is Franklin Feilar, and I am with the Na- 
tional Restaurant Association located here in Washington, D.C. 

We appreciate this opportunity to address this body, and we would 
like to identify the fact that our organization represents some 8 million 
employees across the country, and the total collective number of 
5:15.000 business establishments of which 90 percent are small 
businesses. 

This very week, our subcommittee on Small Business meant to dis- 
cuss the issues of vital concern in 1979 to our industry. 

While we are not prepared today to offer solutions to some of these 
issues and concerns, I am here to tell you of these concerns with docu- 
mentation to be submitted in a very short period. 

While these are not in order of importance that they were presented, 
the five top issues of concern to our industry are as follows : 

Paperwork and regulatory agency proceedings. 

Minimum wage and Social Security increases, which collectively 
exceed about 10 percent, effective January 1, 1979. 

Labor or law reform. 

Tax credits as they affect remodeling for small businessmen; and, 
finally, the financing of a national health care plan is of great con- 
cern to small businessmen. 

These are certainly not all of the issues of concern to our gigantic 
industry, but needless to say. these are more vital ones, and we would 
like to have the opportunity to come back and address you again. 

Mr. Citerkasky. Thank you, Frank. 

I would like to say one thing. The National Restaurant Association 
is a very strong, viable ongoing group that is organized State by State, 
chapter by chapter, and is very valuable, and it is a very vital lobbying 
force because they are organized that way. 

I said to their group a couple of days ago that the effectiveness of 
the efforts of small business in lobbying could be seen by the way 
the labor law was defeated in Congress last year. 

I will say again that if small business wants to get what it wants. 
it has to organize on a chapter-by-chapter, State-by-State, district-by - 
district basis, so when you make your phone calls to your Senators 



95 

and Congressmen, they know who you are, and, therefore, you have 
that much more force when you speak. 

We talked about that before, Frank. I want to say that the rallying 
cry for any small business group is to be very well organized. That is 
one reason why we had a graudated corporation income tax to the tax 
bill the last time around and why we almost won on the simplified 
depreciation. 

It won on the Senate floor, was defeated in this committee, and be- 
cause of the support, we went back to the floor and won on the floor, 
but were defeated in conference. We will try again. 

Xext. 

STATEMENT OF RUTH KOBELL, NATIONAL FARMERS UNION 

Ms. Kobell. I am Ruth Kobell. Our organization represents 300,000 
independent commercial family farmers, who are certainly, I think, 
an important segment of small business in the Nation. 

We want particularly to commend this committee and Senator Xel- 
son for what is called the "widow's tax" provisions in the recent tax 
bill, which provides estate tax credits through recognition of the 
contribution that farm women and other women involved in small 
family businesses make to the value of that business in terms of labor 
and management. 

We believe this will be important down the road in helping main- 
tain family farm operations on the death of a spouse, and the ability 
to transfer that operation to the next generation. 

We believe this is extremely valuable in the whole process of the 
food and fiber policy in this Nation. 

The operation of family farmers have been demonstrated as the 
most efficient in terms of food and fiber production. Yet we note a 
majority of our farm operators are over 50 years old and escalation 
in land values has made it extremely difficult for young people or new 
farmers to come into the business. 

We appreciate the hearings you have had here in terms of the use 
of alternate energy. Farmers are major users of energy, and must be 
assured an adequate and reliable supply. 

We hope that you would have some overview of the ways in which 
we can transfer farm operations to a new generation. 

Thank you. 

Mr. Cherkasky. Thank you. 

. On that point, I wanted to be sure that you realize before you go 
that we do have a specialist on family farms on our staff. We are con- 
ducting our family farm hearings as we did in the past, and we will 
have another one on December 11. 

Yes, sir. 

STATEMENT OF RALPH HARDING, PRESIDENT, SOCIETY OF THE 

PLASTICS INDUSTRY 

Mr. Harding. I am Ralph Harding, president of the Society of the 
Plastics Industry, an association representing about 14 countries. 

I had not intended to speak today, but I find the record is going to be 
incomplete when you lock the doors at 12 o'clock unless there is a 
little more emphasis on overregulation. 



96 

I would hate to have this committee record not to include that, and I 
can say that I am speaking particularly, of course, of the environ- 
mental regulat ions, and I think it has to be carefully dealt with. 

One: These are needed. Most of the people who are involved with 
them will readily agree. "We must have more careful regulation on vari- 
ous environmental issues. 

Two: I don't believe there should be an automatic small business 
exemption per se. because the toxic material is just as toxic in a small 
business as it is in a large business. But there has to be some 
method of care and restraint and consideration in drawing up the regu- 
lation to make it }x>ssible for the small businsses to stay in business. 

This affects not just our industry, the plastics industry, but a great 
many others. The dry cleaning industry could readily shut down, for 
example, and can you go through a long list of the potential horror 
Stories, brought about largely by a lack of understanding of the fallout 
in the writing of these laws, first, and the regulations which follow. 

I think there needs to be much more input from qualified, responsible 
represent at ives in small business in the development of these laws, and 
of these rules which are needed, but which need to be practiced. 

I thank you. 

Mr. Cherkasky. Sir, on that point, we would like to know about some 
of these particular onerous regulations that affect any part of your 
industry. 

If you will, send those to us in writing. We have a bill called the 
Regulatory Flexibility Act, which calls for input by small business in 
the making of regulations. Tt is a long process in getting the bill passed. 
to say nothing of overseeing the regulations that occur after any bill is 
passed. 

I want to be sure that anybody here though knows those regulations 
that particularly impact upon their industry or business, we would 
like to know about that. 

I am asking, of course, for a deluge, but we will pick and choose 
where Ave can be helpful. We are working on one with respect to small 
realtors who are attacked by the HUD regulation on interstate and 
intrastate land sales. 

Thank you, sir. 

Mr. Unsell. 

STATEMENT OF LLOYD UNSELL, INDEPENDENT PETROLEUM 
ASSOCIATION OE AMERICA 

Mr. Unsell. I am Lloyd Unsell, Independent Association of 
America. 

There hasn't been a problem mentioned here this morning that I 
cannot associate with, Mr. Chairman. Overregulation, and paperwork, 
and I don't think there is an industry in America today that is as 
o\ erregulated and deals with such a blizzard of paperwork as the 
small oil and gas producers in this country. 

I won't bring you our specific problems, but I would like to leave 
with you a folder which summarizes more than 50 ongoing regulatory 
ding- before an even dozen agencies of the Federal Govern- 
in which our small staff of 16 professional people are directly 
involved through testimony and other means, trying to represent 
the viewpoint of the small oil and gas industry of this country You 



97 

couldn't be helpful to us on these proceedings, because if you undertook 
this, you wouldn't be doing anything else for the next 5 years. 

But listening here this morning, I have a suggestion that I think 
the Small Business Committee might look at, and that is simply this: 

There are, what, 30-some committees of the Congress. I don't know 
how many of those committees are involved in or write legislation that 
impose reporting requirements or industry. But to give you an ex- 
ample, the Energy Policy and Conservation Act signed by Mr. Ford 
about 3 years ago, in December of 1975, imposed on regulators the re- 
sponsibility to gather an unbelievable volume of data from oil and 
gas producers. When you mentioned to the previous gentleman that 
you would send them the form about which he was concerned and ask 
why it is required, you will get the answer we got, "the law requires 
us to impose this on you." 

There are not one, but three forms, one a self -reporting form on 
crude oil production categories, another, a financial reporting form 
that is a half-inch thick. The smallest one is over 90 pages. 

The other is EIA-Z3, which is a reporting form on crude oil re- 
serves and natural gas reserves, requiring all kinds of detail going 
back to 1972. 

When we talked to oil and gas producers about what is in this 
form, they just sort of blanch, and say, "How can I do it ?" 

The small oil and gas producer doesn't normally know what his 
oil and gas reserves are. We say to DOE, "If you send this to all 
small producers, saying to them you face a penalty if you don't fill 
this out, you are going to get the worst bad numbers in the history of 
the United States." 

He may not know what his reserves are, but he will put a number 
in there to keep from going to jail. This is the kind of thing that 
industry and small business throughout the country is confronted with 
today, so my suggestion to you is, identify those committees of the 
Congress that impose reporting requirements on business and indus- 
try, and do two things. 

One, look for a place in there where you can exempt small business 
enterprises from those burdens. We had a member in our office the 
other day who had a folder this thick, almost 3 inches thick, of forms 
and permits that he filed with agencies of the Government, to get 
cleared to drill a well on public lands in the State of Colorado. 

He said, "Five years ago, I filed one sheet," and he showed it to 
me. The only thing he is doing different is filing that mountain of 
paper. One is an archeological impact statement. He sends people out 
and if they find an Indian arrowhead, a clamp comes down on the 
drilling permit and he is in for G months evaluation on an archeological 
impact. 

This kind of stuff is nonsense. 

Second, besides the small business exemption, why can't we require 
of Members of Congress who impose on the businesses of America 
these onerous burdens, a paperwork impact statement ? 

That is my suggestion to you. I think if we don't come to n halt 
here before very long, we will be drowning the business community of 
America in paperwork, and this country is going to come to a standstill. 

Mr. Cherkasky. I think Senator Mclntyre did sponsor a paperwork 
impact bill. 



98 

Ms. Klatt. It is in Senate Resolution 4. 

Mr. [Tnsj ii.. There was a man who talked about small business enter- 
prises being ground up between big government, big business, and big 
labor. 

I can associate with that, because I don't think there is a better 
example of that in America today than what is happening to the 
small oil and gas producer. There used to be 20,000 such producers. 
Now there are 10,000. The loss of half of them is why this country 
has an energy problem today. Even with 10.000 fewer independents, 
a study covering 5 years by the American Association of Petroleum 
Geologists showed that independents found 63 percent of the natural 
gas in the country and half "of the crude oil. So they are vitally 
important. 

Tn a political sense, the big giant international oil companies are 
under attack as somebody who has to be shot down. The political 
attitude is that you have to do something to those big guys. But it 
is the small guy who always gets ground up in the political actions on 
crude oil prices, and in such things as the gas bill that was just 
passed, where you have about 25 different categories of natural gas, 
and 12 different prices with the Federal Government and the State 
agencies between them trying to sort this bill out. Our people are 
wondering how in the world they are going to comply with it. 

Standard Oil of Indiana, for example, has many people who don't 
do anything but fill out forms for the Federal Government — 100 people. 

Our average member has 20 employees, and none of them knows any- 
thing about Government forms. So this is the kind of thing I am talk- 
ing about. 

Mr. Ctterkasky. I thank you. very much. 

On a high energy note, we will close shop for today. 

I just want to say that I deeply appreciate, on behalf of myself and 
the ^aff and the Members of the Senate on our committee, how much 
we appreciate your taking the time and energy and money to come here 
and give us this input. It is a valuable record. 

It may seem like nonsense to some, but it is very important to me 
and to members of staff. 

We have to relate ourselves more directly to you all from time to 
time to renew our own spirit and our knowledge of your problems. 

Thank you all for coming. 

[Whereupon, at 12 :03 p.m., the hearing was adjourned.] 

[The supplemental information of Mr. Unsell follows :] 

Status of Regulatory and Legislative Issues Directly Affecting Independent 

Producers 

STATUS REPORT OF FEDERAL REGULATORY ACTIONS AFFECTING INDEPENDENT OIL AND GAS PRODUCERS 
DEPARTMENT OF ENERGY, ECONOMIC REGULATORY ADMINISTRATION (ERA) 

Subject (Federal Register reference) I PAA response Status 

"Production and Sale of Imputed Stripper 
Well Crude Oil From Unitized Properties": 

42 Fed. Reg. 36476 (Apr. 15, 1977) Oral testimony presented Feb. 11, 1971. 

43 Fed. Reg. 33694 (Aug. 1, 1978) Oral testimony presented Aug. 5, 1977. Final rule issued, effective as of 

Sept. 1, 1978. 
"Additional Incentives for Tertiary Enhanced 
Recovery Techniques": 

42 Fed. Reg. 2646 (Jan. 12, 1977) Written comments submitted Mar. 1, Notice of decision issued Aug. 

1977. 17, 1977. 

43 Fed. Reg. 33679 Written comments submitted Sept. 27, Final rule effective Sept. 1, 1978, 

1978. and notice of continuation of 

rulemaking for additional in- 
centive. 



99 



STATUS REPORT OF FEDERAL REGULATORY ACTIONS AFFECTING INDEPENDENT OIL AND GAS PRODUCERS— Con. 
DEPARTMENT OF ENERGY, ECONOMIC REGULATORY ADMINISTRATION (ERA)— Continued 



Subject (Federal Register reference) IPAA response 



Status 



"Proposed Amendments to Subpart K of the 
Mandatory Petroleum Price Regulations to 
Provide for Recovery of Increased Proces- 
sing and Marketing Costs by Sellers of 
Natural Gas Liquids and Natural Gas Liquid 
Products": 42 Fed. Reg. 29490 (June 9, 
1977). 

"Pass through of Increased Processing and 
Marketing Costs in the Price of Natural Gas 
Liquid Products": 43 Fed. Reg. 42984 
(Sept. 21, 1978). 

Entitlements based crude oil prices: 43 Fed. 
Reg. 15158 (Apr. 11, 1978). 



"Inclusion of Nonrefining Uses of Crude Oil 
within the Entitlements Program": 
43 Fed. Reg. 16987 (Apr. 25, 1978) 



Mailing to cooperating associations 

Jan. 25, 1978. 
Oral testimony presented July 20, 1978. 



Final rule issued, effective on 
Nov. 1, 1978. 



Mailings to IPAA Crude Oil Committee 
Apr. 4, 1978, Apr. 13, 1978, and 
Apr. 24, 1978. 

Written comments objecting to pro- Pending, 
posal submitted May 26, 1978. 



43 Fed. Reg. 31157 July 20, 1978. 



'Heavy California Crude Oil— Additional 
Entitlements and Pricing Measures": 
43 Fed. Reg. 17392 Apr. 24, 1978 



43 Fed. Reg. 26540 May 20, 1978. 



(See also: DOE-Office of Hearings and 
Appeals.) 
'Amendment to DOE Recordkeeping Re- 
quirement and Statement cf Audit Policy": 
43 Fed. Reg. 27777 (May 27, 1978). 



'Comments on Request for Interpretation of 
NGL Price Regulations": 43 Fed. Reg. 
28518 (July 21, 1978). 



Mailings to IPAA Crude Oil Committee 
and cooperating associations 
Apr. 25, 1978, May 10, 1978 and 
May 16, 1978. 

Requested extension of comment 
peiiod and hearing dates. 

Written comments submitted May 26, 
1978. 



Mailings to Crude Oil Commission 

Mar. 7, 1978. 
Oral testimony presented Mar. 30, 1978. 
Letters to Strauss, Schlesinger, Miller, 

K r eps. 
Meeting with DOE and DOC 



Comment deadline extended 30 
days and hearing postpone- 
ment denied May 10, 1978. 

Comment deadline extension 

May 15, 1978. 
Notice of intent to issue proposed 

rulemaking pending* 



Requires, inter alia, that crude oil pro- 
ducer maintain records for at least 
7 years and states that there is no 
statute of limitations on civil liability 
of crude oil producers for violations 
uncovered by audit. Mailing to 
Crude Oil Commission June 30, 
1978; mailing to Cooperating Associ- 
ations, July 6, 1978. 

Submitted written comments Aug. 21, Pending. 
1978. DOE had solicited comments 
on an ARCO request for interpreta- 
tion of NGL price reguiations. 



Final Rule issued, 
June 1, 1978. 



Final. 



effective 



DEPARTMENT OF ENERGY, FERC (FPC) 



Policy examination of 60-day emergency 
natural gas program: 
RM78-7, 43 Fed. Reg. 15730 (Apr. 14, 
" 1978* 



Comments delivered toIFERC on May 
8, 1978. 



43 Fed. Reg. 36741 (Aug. 17, 1978) Calling for simplification of sales re- 
quirements and procedures and for 
longer lead time in announcing 
emergency requirements. 
Petition by Consumer Coalition demanding Comments delivered to FERC on Dec. 
FERC extend full controls to the intrastate 20, 1977 opposing the consumer 
market: RM78-3, 42 Fed. Reg. 62108 (Dec. group position. 
1, 1977). 



Initial comments will be used to 
implement proposed amend- 
ments which will be subject 
to public comment. Comments 
thus far favor continuation 
of the program but differences 
exist regarding the need for 
pricing guidelines and de- 
finition of emergency criteria. 

Proposed new rule was issued 
Aug. 16, 1978. 



Petitoin filed by Consumer 
Coalition on Nov. 4, 1977* 
Certain indicated Producers 
filed motion for dismissal of 
petition on Nov. 22, 1977. 
Final action deferred pending 
receipt of comments. FERC 
could act on certain sections 
of petition which related to 
other proceedings. 



100 



STATUS REPORT OF FEDERAL REGULATORY ACTIONS AFFECTING INDEPENDENT OIL AND GAS PRODUCERS— Con. 
DEPARTMENT OF ENERGY, FERC (FPC)-Continued 



Subject (Federal Register reference) IPAA response 



Status 



LNG import policy, 42 Fed. Reg. 62419 (Dec. 
12, 1977). 



1977-78 biennial review of national rates for 
natural gas, RM77-13, Fed. Reg. 13048 
(Mar. 8, 1977). 



Granting rehearing in pait of order 526 B but 
10 for reporting of re- 
RM74-16 form 40, order 526-C, 43 



presciibed form 40 for reporting 

serves, 

Fed. Reg. 8118 (Feb. 28, 1978). 



Procedures to be followed by FERC in re- 
viewing remedial orders stemming from 
DOE audits, RM78-10, 43 Fed. Reg. 19669, 
(May 8, 1978). 

Interim regulations governing FERC review 
of DOE crude oil price decisions, 43 Fed. 
Reg. 35907, (Aug. 14, 1978). 

Valuation of oil pipelines and oil pipeline reg- 
ulation to revise method of oil pipeline rate 
setting, Rm 78-2 (formerly ICC docket Ex 
parte 308). 

Trans-Alaska pipeline system rate proceed- 
ing, OR78-1 (transfened from ICC). Would 
establish rate for crude oil shipment— FERC 
staff and Justice Department suggest case 
be used to set standard for all crude oil 
pipelines. 



Comments delivered to FERC on Dec. 
29, 1977 pointing out inconsistency 
in allowing higher prices for impoits 
than for domestic production and 
calling for incremental pricing of 
imports. 

IPAA filed notice of intervention on 
Mar. 8, 1977. 



IPAA filed initial comments to pro- 
posed rulemaking on June 30, 1974. 



Comments delivered to FERC on June 2, 
1978. 



Written comments submitted Sept. 15, 
1978, regarding price adjustment 
denials by DOE offices. 

Statement by Jack Allen to be filed 
Oct. 23, 1978 _ 



Jack Allen to present rebuttal testi- 
mony in opposition to position of 
FERC and Justice Department staff. 



Pending subject to furthe 
international negotiations. 



On Sept. 30, 1977 case indef- 
initely postponed. FERC with- 
holding final order pending 
legislative outcome. 

Gulf has asked fot a stay of 
form 40 (July 28, 1977). 
Denied. Submittal of form 40 
was due Apr. 1, 1978 for 1974, 
1975 and 1976 data. Data for 
1977 is due Dec. 1,1978. Form 
EIA-23 has been proposed to 
replace form 40. Limited ap- 

froval given by OMB for 
977-78 data only. 
Pending. 



Interim regulations now in effect 
as of Aug. 8, 1978; final regu- 
lations pending. > 

Public hearing set Oct. 23-24. No 
date set for final action. 



Testimony will continue through 
October. No final action ex- 
pected for several weeks. 



DEPARTMENT OF ENERGY, ENERGY INFORMATION ADMINISTRATION (EIA) 



'Survey of Oil and Gas Well Operators to 
Obtain Estimates of U.S. Crude and Natural 
Gas Reserves, Production and Related 
Data" (proposed form EIA-23): 
43 Fed. Reg. 6993 (Feb. 17, 1978) 



OMB review of EIA-23. 



"Producer Self-Reporting Form": Proposed 
form EIA-18. No Federal Register notice. 

Letter from EIA requesting comments on in- 
formation gathering and reporting Feb. 13, 
1978. 

"Financial Reporting System" (EIA-28): 

Fed. Reg. July 8, 1977 



Requested extension of comment Extension of comment period 
period Feb. 21, 1978. Filed FlOA granted on Mar. 3, 1978 and 
request Apr. 28, 1978. Oral testimony Apr. 6, 1978, FlOA request 
presented by Jack Allen May 8, 1978. pending form pending. 
Written comments submitted May 8, 
1978. Attempting to obtain legisla- 
tive relief. 

Submitted written comments to OMB Awaiting final clearance from 
Sept. 7, 1978; mailings to Crude Oil OMB. 
Commission and cooperating Associ- 
ations September 1978 re sending 
individual comments to OMB; mail- 
ings to cooperating associations. 
Crude Oil Commission, Accounting 
Principles and Financial Reporting 
Commission re submitting comments 
to OMB Aug. 23, 1978. Letter to 
selected Senate and House Members, 
Sept. 11,1978. 

Mailing to cooperating associations Canceled. 
Nov. 2, 1977. Several meetings with 
DOE personnel. Solicited congres- 
sional assistance. 

Written comments submitted Apr. 6, No action anticipated. 
1978. 



Fed. Reg. June 22, 1978 (Public hearing 
on proposed final version). 



Request for A. V. Jones to participate 
in panel discussion on July 29. 

IPAA survey of members financial 
reporting system. 

June 29, request to appear. Also, re- 
requested hearings delay and exten- 
sion of comment peiiod 60 days. 

July 1917, oral testimony by F. X. 
Jordan at joint hearing EIA and OMB. 



A. V. Jones, panelist, July 29, 1978. 
Completed 1,289 responses. 

July 14, delay denied. However, 
promise by EIA of 60-day 
notice prior to extended data 
collection. 

OMB clearance expected soon. 
Phase 3, which will involve 
sampling smaller companies' 
is scheduled to go into effect 
in 1979. EIA may hold hearing 
reimplementation of phase 3. 



101 

STATUS REPORT OF FEDERAL RFGULATORY ACTIONS AFFECTING INDEPENDENT OIL AND GAS PRODUCERS— Con, 
DEPARTMENT OF ENERGY, OFFICE OF HEARINGS AND APPEALS (OHA) 



Subject (Federal Register reference) IPAA response 



Status 



"Inquiry on Transportation System serving 
the Northern Tier and Inland States": 43 
Fed. Reg. 17392 (Apr. 24, 1978). 

Hearing to determine DOE position re SEC 
proposed adoDtion of FAS8 statement 19, 
43 Fed. Reg. (Jan. 24, 1978). 

"Improving Government Regulations— Pro- 
posals for Imoltmenting Executive Order 
12044": 43 Fed. Reg. 18634 (May 1, 1978). 

"Amendments to Administrative Procedures 
Regarding Issuance of Remedial Orders": 
43 Fed. Reg. 1930 (Jan. 13, 1978) and 43 
Fed. Reg. 13073 (Mar. 29, 1978). 

"Proposed Amendments to the Entitlements 
Program with Respect to Imported Residual 
Fuel Oil": 43 Fed. Reg. 26551 (June 20, 
1978). 

"Supplement to Exceptions and Appeals 
Guidelines": 43 Fed. Reg. 19446 (May 5, 
1978). 

"Hearing re Applications for Exception Filed 
by Crude Oil Producers": 43 Fed. Reg. 
26792 (June 22, 1978). 



Written comments submitted May 11, DOE will issue a response, 
1978. 

Oral testimony presented by Jack DOE report issued. 
Allen, Feb. 21, 1978. 

Mailing to Crude Oil Committee Pending. 



Written comments submitted May 10, Do. 

1978. 



Do. 



Mailing to Crude Oil Committee, June 6, Final. 
1978. 

Written comments submitted Aug. 1, Pending. 
1978. Oral testimony presented by 
James E. Russt.ll Aug. 16, 1978. 



DEPARTMENT OF INTERIOR, BLM 



"Rights-ol-Way Under the Mineral Leasing 
Act" proposed rules: 43 Fed. Reg. 8770 
(Mar. 2, 1978). 

'I nventory and Planning" Intent to Propose 
Rulemaking: 43 Fed. Reg. 88i4 (Mar. 3, 
1978). 

"Wilderness Review." Notice of intent to de- 
velop wilderness review procedure: 43 
Fed. Reg. 9539 (Mar. 8, 1978). 



Instruction memorandum from Frank A. 
Edwards, Minerals Management re appeal 
of Sierra Club on oil and gas leasing in the 
"Overthrust Belt," Feb. 15, 1978. 



"Wilderness Protection Stipulation for Oil 
and Gas Leases". 



Submitted written comments May 5, 
1978. Mailings to PL Comm. Sub- 
comm. Jan. 25, 1978, Mai. 8, 1978, 
May 8, 1978. 

Requested extension of comment pe- 
riod. Mailing to PL Comm. Subcomm. 
Mar. 20, 1978. Subcommittee meet- 
ing Apr. 21, 197?. 

Requested extension of comment pe- 
riod. Mailings to PL Comm. Subcom- 
mittee, Mar. 20, 1978, Apr. 3, 1978, 
Apr. 7, 1978, Apr. 11, 1978, Apr. 13, 
1978, May 15, 1978. Wrote to all 
State directors. Attended national 
Kickoff briefing Apr. 5, 1978. PL 
Comm. members attended State 
meetings. PL Comm. Subcommittee 
meeting in Denver Apr. 21, 1978. 
Meeting with review program Leader 
at I PAA May 5, 1978. Submitted com- 
ments iTlay 26, 1978. Attended na- 
tional workshop to develop wilder- 
ness criteria, June 16, 1978. Wrote 
to Director Frank Gregg regarding 
BLM policy on leasing and operating 
procedures, June 27, 1978. Numerous 
meetings with DOI officials. Held 
special meeting with IPAMS for all 
interested members. Mailings to PL 
Committee May 26, 1978, June 1, 
1978, June 27, 1978, June 29, 1978, 
Julv 17. 1978, Aug, 30, 1978, Sept. 8, 
1978, Sept. 12, 1978, Oct. 2, 1978. 
Developed "wilderness" pamphlet. 

Letter from Jack Allen to Secretary 
Andrus. Meeting with Frank Edwards. 
Requested meeting with Andrus. 
Mailing to PL Subcommittee. May 
16, 1978. Letter from Frank Edwards 
explaining BLM policy. Mailing to 
PL Comm. July 17, 1978. 

Communications in person to Leo 
Krulitz, Solicitor, DOI; Guy Martin, 
Assistant Secretary, Land and Water 
Resources; Gary Wicks, Department 
Assistant Secretary, Land and Water 
Resources. Mailings to PL Subcomm. 
and State Reprepresentatives. June 
14, 1978, June 20, 1978, July 16, 1978. 



Do. 



Do. 



Final inventory procedures issued 
Sept. 27, 1978. Interim manage- 
ment procedures pending. 



Directive was completely re- 
scinded May 8, 1978. 



Currently in use by BLM. Open 
for industry input. 



102 



STATUS REPORT OF FEDERAL REGULATORY ACTIONS AFFECTING INDEPENDENT OIL AND GAS PRODUCERS-Con. 
DEPARTMENT OF INTERIOR, BLM— Continued 



Subject (Federal Register reference) IPAA response 



Status 



DOI/Office of Solicitor: Legal interpretations 
of the Federal Land Policy and Management 
Act 



Written comments on wilderness re- 
view included IPAA interpretation of 
FLPMA. Jointly sponsored letter to 
Solicitor Leo Krulitz re industry in- 
terpretation of FLPMA which sought 
review of current DOI interpretation. 
Met with Solicitor twice to discuss 
comprehensive revision of interpre- 
tation (June 30, 1978, Aug. 30, 1978). 
Mailings to PL Comm. July 6, 1978, 
Sept. 1, 1978, Sept. 8, 1978. 



Comprehensive opinion issued 
Sept. 27, 1978. 



DEPARTMENT OF INTERIOR, BIA, NPS, USGS 



DOI/NPS, "Minerals Management; Compre- 
hensive Regulations," proposed rule: 42 
Fed. Reg. 63058 (Dec. 14, 1977). 



DOI/BIA, "BIA Regorganization," recom- 
mendations of reorganization task force: 
43 Fed. Reg. 16284 (Apr. 10, 1978). 



DOI/USGS, Revision of NTL-3 "Notice to 
Lessee's and Operator's— Oil and Gas 
Leases Report of Undesirable Events": 43 
Fed. Reg. 20060, May 10, 1978. 



Submitted comments Feb. 10, 1978. Re- 
quested meeting with NPS officials. 
Wrote to J. R. Schlesinger Feb. 10, 
1978. Met with NPS officials May 4, 
1978. Mailing to PL Subcommittee 
Feb. 15, 1978. 

Attended task force meetings. Sub- 
mitted comments to TF Chairman. 
Met with TF member. Mailings to PL 
Subcommittee Mar. 3, 1978, Mar. 22, 
1978, Apr. 3, 1978, Apr. 17, 1978. 

Mailed to PL Comm. May 18, 1978. Will 
submit comments. 



Pending; expected to be issued 
October 1979. 



Task force ^completed action 
Mar. 31, 1978. 



Pending; 
year. 



action expected next 



DEPARTMENT OF AGRICULTURE, FOREST SERVICE (FS) 



"Guidelines for Decisionmaking on Proposals 
for Access and Drilling in Wilderness Study 
Areas".(Not published in Federal Register; 
internal Agency document). 

"Roadless Area Review and Evaluation, 
Phase II"; Publication of Inventory and 
Procedures: 42 Fed. Reg. 59688 (Nov. 18, 
1977); "Publication of Amendment to 
Inventory"; 43 Fed. Reg. 6291 (Feb. 14, 
1S78). 



"Roadless Area Review and Evaluation, 
Phase II" Joint USDA/congressional col- 
loquium letter of invitation to participants 
(Mar. 15, 1978). 

"Roadless Area Review and Evaluation- 
Phase II; Draft Environmental Statement." 



'Roadless Area Review and Evaluation — 
Phase II, National Direction. Alternative 
Generation and Evaluation Procedures." 



Submitted written comments Apr. 21, Final Guidelines issued June 

1978. Mailings to PL Subcommittee 1978. 

Mar. 27, 1978, Apr. 11, 1978, May 1, 

June 20, 1978. 
Met with DOE representative about Comment deadline closed Oct. 1, 

and obtained copy of DOE minerals 1978. 

assessment report on RARE II lands. 

Requested release of USGS minerals 

data on RARE II lands in Overthrust 

Belt. Mailings to PL Subcommittee 

Mar. 3, 1978, Mar. 8, 1978, Mar. 22, 

1978, Mar. 27, 1978, Apr. 6, 1978. 
Participated in colloquium on Apr. 4, 

1978. Submitted written comments 

Apr. 18, 1978. 



RARE II DES public comment 
period ended Oct. 1, 1978; 
pending final environmental 
statement due Oct. 31, 1978. 



Mailings to PL Comm. June 14, 1978, 
June 27, 1978, July 13, 1978, Aug. 2, 
1978, Aug. 14, 1978, Aug. 15, 1978, 
Sepf 11, 1978, Sept. 14, 1978, Oct. 3, 
1978 Mailings to IPAA members 
June 29, 1978, Aug. 1, 1978. Sur- 
veyed members for tract-specific 
data. Submitted general and tract- 
specific comments. Participated in 
proposed development of panel of 
experts to review minerals data (later 
dropped by FS). Represented oil and 
gas industry in panel at RARE II East 
Symposium. Developed "wilder- 
ness" pamphlet. 

Comments on draft and related RARE Expected to be developed after 
il problems. Attended informal Oct 20, 1978. 
hearing at FS moilins to PL Comm. 
July 6, 1978. 



103 

STATUS REPORT OF FEDERAL REGULATORY ACTIONS AFFECTING INDEPENDENT OIL AND GAS PRODUCERS— Con. 

DEPARTMENT OF LABOR, OSHA 



Subject (Federal Register reference) IPAA response 



Status 



Permanent standard regulating occupational 
exposure to benzene; 43 Fed. Reg. 5917 
(Feb. 10, 1978). 



On behalf of all members, A. IPAA 
filed request for variance from stand- 
ard. Asked for 1-year extension of 
time to conduct initial air monitoring 
and classification of certain provi- 
sions. 

B. IPAA filed lawsuit seeking judicial 
review of standard. 



A. OSHA is holding request in 
abeyance pending outcome of 
judicial review of standard and 
May 23, 1978, rulemaking pro- 
ceeding. 

B. Standard overturned by judi- 
cial action Oct. 5, 1978. Govern- 
ment has 90 days to decide 
whether to seek U.S. Supreme 
Court review. Permissible ex- 
posure level now back to 10 
ppm under old standard. 

Proposed amendments to permanent benzene 
standard: 

43 Fed. Reg. 12890 (Mar. 28, 1978) 1. IPAA sent letter to OSHA stating 

reasons for not appearing at hearing 
on May 23, 1978. 
43 Fed. Reg. 18215 (Apr. 28, 1978) 2. Written comments requested exemp- 
tion from all provisions of standard 
for crude oil and natural gas produc- 
tion and exploration ooerations. 

43 Fed. Reg. 27962 (June 27, 1978) Mailing to Environment and Safety Final rule, but now mo.ot as 

Commission June 27, 1978. Mailing result of Oct. 5, 1978, court 
to executive committee vice presi- decision, 
dents, directors, and cooperating 
associations June 28, 1978. 

General carcinogen standard (for identifying Requested modification to standard Pending. 

and regulating carcinogens in workplaces): 
42 Fed. Reg. 54147 (Oct. 4, 1977). 

ENVIRONMENTAL PROTECTION AGENCY (EPA) 



Classification and regulation of hazardous 
wastes, guidelines published: 42 Fed. Reg. 
(May 2, 1977) 



Regulations governing state underground in- 
jection control program, list of States re- 
quiring program: 43 Fed, Reg. 43420 
(Sept. 25, 1978), 

Regulations Implementing Clean Air Act 
Amendments of 1977— several final regu- 
lations have been published. 

Toxic Substances Control Act: 43 Fed. Reg. 
16178 (Apr. 17, 1978). 



Eliminate or modify provisions in EPA 
drafts that classify and regulate sub- 
stances (e.g., drilling muds) as haz- 
ardous substances. Meeting with EPA 
reclassification of drilling muds 
July 26, 1978. 

Will present oral testimony and submit 
written comments. 



Discussions with EPA staff and con- 
tractor assessing air emissions from 
onshore production facilities. 

Action alert to cooperating associations 
with information on required action, 



Pending— a number of regula- 
tory provisions will be pro- 
posed implemented in the 
next few months. 



Pending— regulations originally 
proposed August 1976. New 
regulations will be substan- 
tially different from earlier 
version. 

Pending. 



Final, 



SECURITIES AND EXCHANGE COMMISSION (SEC) 



SEC regulation on nonpublic offers of securities: 
Rule 146 relating to exemption from registra- 
tion. Requires filing of form 146 if rule 146 
is means of seeking to establish exemption 
but use of rule 146 is optional: 43 Fed. Reg. 
10548 (Mar. 14, 1978). 

SEC examination of effects of rules and regula- 
tion on ability of small businesses to raise 
capital and impact of disclosure requirements 
under Securities Act: 43 Fed. Reg. 10876 

- (Mar. 15, 1978). 

SEC: Private placement exemptive rule — pro- 
posal to prohibit persons who receive com- 
pensation from issuer as also serving as 
offeree representative and to amend dis- 
closure required for offers of less than 
$500,000: 43 Fed. Reg. 10701 (Mar. 15, 1978), 
SEC release No. 33-7715 No. 33-7715 (Sept. 
8, 1978). 

Financial accounting and reporting practices for 
oil and gas producing activities: Fed. Reg. 
(Sept. 12, 1978). 

Hearing to determine if SEC should rely on 
FASB statement 19 or some alternative ap- 
proach: Fed. Reg. (Jan. 4, 1978). 



IPAA advised producers of apparent 
misunderstanding of intent of no- 
tice. Task force appointed to study 
current SEC activity in regulation 
of independentjproducers and re-c 
ommend appropriate action. 

Task force appointed to study SEC 
regulation of independent pro- 
ducers. Hearings monitored. State- 
ment presented for record of SEC 
hearings, (June 6, 1978). 

Task force appointed to study SEC 
regulation of independent pro- 
ducers and recommend appro- 
priate IPAA action. 



Written comments were filed by 
IPAA regarding SEC proposal for 
new "reserve recognition account- 
ing" system on Oct. 13, 1978. A 

Oral testimony by Jack Allen Apr. 
3, 1978. 



Effective May 3, 1978. 



SEC field hearings conducted in 
Washington, Los Angeles, Den- 
ver and Ail inta, Apr. 18, 1978- 
May 16, 1 . 78. SEC staff pre- 
paring recommendations. 

Pending, th s is part of a genera 
review of SEC regulation of 
non-public offerings and se- 
veral additional changes are 
possible in the future. Final 
amendment published reduc- 
ing disclosure requirements for 
transactions less than $1,500* 
000. 

Pending. 



On Oct. 4 the FASB agreed to sus- 
pend indefinitely the effective 
date of FASB Statement 19 and 
reserved consideration of the 
FASB's future involvement in 
establishing accounting stand- 
ards for oil and gas producing 
companies. 



104 



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APPENDIX 



October 12, 1978. 

Statement of the Independent Bakers Association on the Tax Bill, 
H.R. 13511, Now the Subject of House-Senate Conference 

The Independent Bakers Association, representing more than 50 percent of 
the nation's wholesale bakery production, strongly commends both the House 
and Senate for their actions to date on taxes. We particularly compliment the 
Congress in the following areas and trust that these gains for medium and small 
sized wholesale bakers are retained in the final conference report : 

GRADUATED INCOME TAX FOR SMALL CORPORATIONS 

IBA applauds the actions of both Houses of Congress in granting tax relief 
for the first $100,000 of corporate profits in four steps. 

INDEPENDENT CONTRACTORS RELIEF 

IBA is pleased that the Senate and the Rangel panel of the House Ways and 
Means Committee have recently granted relief for companies who have entered 
into "independent contractor" relationships with certain classes of employees 
and now find themselves harassed by the Internal Revenue Service. An increas- 
ing number of bakers are adopting "independent contractor" systems and have 
entered into those relationships in "good faith". IBA trusts that the conferees 
can resolve the very minor differences in the Senate and Rangel proposals and 
approve this much needed help. 

CORPORATE INCOME TAX RATES ABOVE $100,000 

IBA supports the Senate proposals to reduce over-all rates for corporations to 
44 percent of net income by 1981. 

DEPRECIATION FOR SMALL BUSINESS 

As loyal members of the Small Business Legislative Council, IBA supports 
their efforts to permit in each year $25,000 in a three year straight line deprecia- 
tion write-off as provided by the Senate in its bill. 

Like all small and medium sized small businesses in this country, the members 
of the Independent Bakers Association have seen our numbers reduced over the 
years from 10,000 in 1936 to 5.000 immediately following World War II to less 
than 1,200 in 1978. Governmental tax policies that have not recognized the special 
needs of small business, particularly in our ability to retain earnings that permit 
our members to modernize and adopt new methods so vital to staying in com- 
petition with our giant competitors. We simply do not have the same access to 
capital and capital markets that are available to national or chain bakers. There- 
fore, we applaud the efforts of concerned Senators and Congressmen who have 
supported efforts such as the graduated income tax and depreciation breaks for 
smaller firms. These and similar actions will help to correct the present im- 
balance between the giants and small businesses. 

In 1979 when the new Congress convenes, we hope to interest our friends on 
Capitol Hill in expanding some of these concepts and in several new ideas. 
Briefly we would hope that you would consider additional relief as follows : 

1. IBA would like to see the concept of graduated income taxes for small 
businesses expanded to the first $500,000 of net income. 

2. IBA would like to see a tax provision eliminating the accumulated earnings 
tax for smaller businesses, who must build up reserves in good years. 

3. IBA would like to see the first year limit for capital acquisition increased 
to $1,000,000 which would result in an additional $200,000 in depreciation. 

(107) 



10S 

In summary, however, IBA wishes to commend and thank the Senate and 
House for their efforts to help the small and medium sized wholesale bakers by 
giving them special tax relief to help them stay in business. We earnestly hope 
that the final Congressional tax bill in r.»7s will contain the small business relief 
provisions outlined in this statement. This relief is vital to the independent seg- 
ment of the bakery industry. 

National Ventube Capital Association, 

Washington, B.C., OctoU r 20, 1918. 
Hon. Gaylord Nelson, 

Chairman, Select Committee on small Business, 
Washington, D.C. 
Attention: William B. Cberkasky. 

Deab Senator Nelson: Thank you for your invitation to attend the meeting 
with the Select Committee on Small Business staff at 9:30 a.m. on Thursday. 
November 10. I look forward to attending as the representative from the National 
Venture Capital Association. 

Although NVCA is interested in a number of legislative matters, a revision of 
the treatment of qualified stock options is our highest priority. In order to pro- 
vide incentive for managers to take positions with new, small, high-risk com- 
panies, it is necessary to treat qualified stock options in a pre-1969 manner. As it 
DOW stands, executives must pay their tax when they exercise their option, as 
opposed to paying it when they actually sell their stock. This is a significant 
dis-incentive and should be eliminated in order to provide greater opportunities 
for able executives to justify working for a small company as opposed to a safe, 
large company. 

We are also interested in legislative action that would support the Labor 
Department's new regulations modifying the effect of the Prudent Man Rule on 
pension investments in small business. As always, we enjoy working with your 
committee, and look forward to the meeting on November 16. 
Sincerely, 

Daniel T. Kingsley, 

Executive Director. 

Cast Metals Federation, 
Rocky River, Ohio, October 26, 1978. 
Mr. William B. Cherkasky. 

Staff Director, Senate Select Committee on Small Business, 
Washington, D.C. 

Dear Mr. Cherkasky : Thank you for inviting the Cast Metals Federation to 
participate in the Small Business Committee's Staff Meeting on November 16. 
Regretfully, travel forces us to decline. 
We will submit written recommendations. 
Gratefully, 

Walter M. Kiplinger, Jr., 
Washington Representative. 

ADAPSO, 
November 6, 1978. 
William B. Cherkasky, 

Staff Director, Senate Select Committee on Small Business, 
Washington, D.C. 

Dear Mr. Cherkasky: We at ADAPSO are most appreciative of receiving 
Senator Nelson's invitation to meet with the United States Senate Select Commit- 
tee on Small Business staff at 9 :30 a.m. on Thursday, November 16. I shall be 
representing the Association. 

I believe the emphasis for discussion with the staff should focus on tax pro- 
posals and small business, small business depreciation, government contracting, 
and certainly the expanding influence of the small business administration. 
I look forward to a mutually rewarding dialogue. 
Sincerely, 

Jerome L. Dreyer, 
Executive Vice President. 



109 

OAMO, 

November 7, 1918. 
Mr. William B. Chebkasky, 

Executive Director, Select Committee on Small Business, 
U.S. Senate, Washington, D.C. 

Dear Bill: We will not be able to participate in the meeting which you have 
scheduled for Thursday, November 16 in Washington regarding Small Business 
and the White House Conference. 

One thought we would like to interject into the process is the need for Congres- 
sional action which postpones the increases in the minimum wage. 

Our members feel that the increase in the minimum wage as enacted by Con- 
gress with automatic increases in the minimum wage through the year 1981 are 
inflationary. Therefore, because inflation is our number one problem, postpone- 
ment of the scheduled increases in 1980 and 19S1 should be postponed indefinitely. 

It should be understood that each time the minimum wage rates are increased, 
although all employers are not directly affected by this change, it does relate to 
other employees and their demands for wage rate increases. 

For example, in January of 1979 the minimum wage increases from $2.65 to 
$2.90 per hour. Some employers will have to increase their minimum wage rates 
accordingly, which is an inflationary factor to them because it does not increase 
productivity. The other major consideration is that all other employees will 
expect an increase on the same basis of the increase from the $2.65 to the $2.90 
as a fair and equitable increase for them also. 

This simple fact of life should be more abundantly clear to our Congressional 
representatives if they are truly going to attack the problem of inflation or any 
other of the economic issues which are of concern to business and industry. 

Furthermore, the federal law does not provide a substantial youth differential 
in the minimum wage law. 

We believe that all persons up to the age of 21 should not be included in federal 
minimum wage laws. 

This would give the job market system a chance to better operate and help to 
employ people in this age bracket. 

Your consideration of our thoughts on this major small business problem 
would be greatly appreciated. 
Sincerely, 

Louis Micheln. 
Executive Vice President. 

MORE EQUALS LESS— THE NEW MINIMUM WAGE LAW 

The New Minimum Wage Law 

"fair labor standards amendments of 1977" 

Business firms of all sizes and more than 50 million workers in the 50 states 
and the District of Columbia currently are affected by the Fair Labor Standards 
Act. The 1977 amendments to this Act make important changes in minimum 
wage rates, overtime, coverage and other provisions. 

minimum wage rates 

During the year 1977, the minimum wage rate for all employees covered by 
the Act (except agricultural employees) was $2.30 per hour. In the case of 
covered agricultural employees this hourly rate was to be required on the first 
day of 1978. Under the new minimum wage law, the Fair Labor Standards 
Amendments of 1977, the minimum wage rates for all covered employees, 
including agricultural employees, will be: 

Per hour 

Jan. 1, 1978 $2. 65 

Jan. 1, 1979 2. 90 

Jan. 1, 1980 3. 10 

Jan. 1, 1981 3.35 



40-2S' 



110 

OVERTIME 

The new Fair Labor Standards Amendments of 1077 do not change the basic 
requirement thai covered employees be paid time-and-one-half for all hours 

worked in excess of 40 hours per week. The new law, however, (loos make a 
number <>t* overtime requirement changes for certain kinds of employment. 

1. Hotel, motel, and restaurant employees: This overtime exemption contained 
In earlier law Is reduced to 44 hours effective January, 1978, and the exemption 
Is repealed effective January 1. 1979. Overtime will then have to be paid for 
hours worked in excess of 40 per week. 

2, Employees of Concessioners in National Parks, Forest*, and in the National 
Wildlife Refuge System: Overtime must he paid for hours worked over 56 in 
any week. Private Skiing facilities maintain exemption (Note provision, in 
•'coverage," below, relating to private skiing facilities.) 

:;. c<,t i<,» Ginning Employees: Overtime must be paid for hours over 10 per 
day and 48 per week for the ontire-14 workweek period. 

i. Shade-grown Tobacco Employees: The overtime exemption contained in 
prior law is repealed. 

.">. Religious or Non-profit Edueation Conference Centers;: As of November 1, 
1978 employees of organized camps and religious or non-profit educational 
< inference centers operated on a seasonal basis are exempt from the overtime 
requirements, (See also exemption under "coverage" below.) 

TIP CREDIT 

The new minimum wage law changes the definition of "tipped employee," and 
lowers the credit an employer can take against the minimum wage. 

Under the prior law a "tipped employee" was defined as a person who regii- 
larly made more than $20 per month in tips. The employer could then apply 
those tips to pay up to 50 percent of the minimum wage rate, thus a "tip credit." 

Under the new law: A tipped employee is defined as a person who regularly 
receives more than $30.00 per month in tips. The tip credit then can be taken 
against the minimum wage is : 

January 1. 1970 — 15 percent (of the hourly minimum wage). January 1, 1980 — 
40 percent (of the hourly minimum wage). 

COVERAGE 

The types of businesses that are covered can be classed, essentially, as those 
whose employees are either (a) engaged in interstate commerce; (b) engaged 
in the production of goods for commerce, or (c) employed in an "enterprise" 
engaged in commerce or the production of goods for commerce. The law, however, 
clearly exempts many employees, and specifically states so in the statute. Ques- 
tions of individual coverage should be directed to the local office of Department 
of Labor, Employment Standards Administration, Wage and Hour Division. 

Changes in coverage and exemptions contained in the new minimum wage law 
include the following : 

1. Retail and Service Establishment Coverage: Under the new law (effective 
November 1, 1977), enterprises consisting of one or more retail or service estab- 
lishments are not covered if their annual gross volume of sales is not more 
than: 

July 1, 1978 $275,000 

July 1, 1980 $325,000 

December 31, 1981 $362,500 

Under prior law and until July 1, 1978, such enterprises are not covered if gross 
sales annually are $250,000 or less. 

It is important to note that no reduction in wages or loss of overtime cora- 
pensation for employees is permitted in those cases where an enterprise currently 
covered becomes exempt due to the increases in the dollar volume test shown 
above. 

2. Employees of Concessioners in National Paris. Fo)~esfs. and in the Xational 
Wildlife Refuge System: Employees must be paid the minimum wage. Private 
skiing facilities, however, maintain their exemption. 

::. Religious or Non-profit Educational Con fen nee Centers: Effective Novem- 
ber 1. 1077, employees of organized camps ami religious or non-profit educational 
conference centers operated on a seasonal basis are exempted from minimum 
wage requirements. 



Ill 

4. Students (Retail-Service Establishment, Agriculture): As of November 1, 
1VT7, the number of full time students, employer certified, that can be hired 
part-time and paid 85 percent of the minimum wage is increased to six. A new 
simplified certification application is to be drafted. 

5. Agricultural Child Workers: Effective November 1, 1977, the Secretary of 
Labor may waive child labor restrictions under specific guidelines. The new law 
requires that the waiver cannot apply to a child under ten and the children can- 
not be employed for more tban eight weeks a year. 

REMEDIES 

Employees are given the right to hie suit against an employer who has dis- 
charged or discriminated against an employee who sought to enforce the Act or 
cooperated with the Secretary of Labor in enforcing the Act. 

MINIMUM WAGE STUDY COMMISSION 

A Minimum Wage Study Commission will be established to study the Fair 
Labor Standards Act of 1938 and its social, political, and economic implications. 
The Commission will make an initial report, one year after members are ap- 
pointed, on the effects of the Act with regard to employees of conglomerates. It 
will make a final report 36 months after its appointment. 

EFFECTIVE DATES 

Unless otherwise specified, the changes contained in the new minimum wage 
law become effective on January 1, 1978. 

PUERTO RICO AND TERRITORIES OR POSSESSIONS OF THE UNITED STATES 

Special provisions relate to those parts of the United States not included in the 
fifty states and the District of Columbia. Information for these areas is available 
from Department of Labor, Employment Standards Administration, Wage & 
Hour Division, Washington, D.C. 

National Micrographics Association, 

Silver Spring, Md., November 8, 1978. 
Mr. William B. Cherkasky, 

Executive Director, Select Committee on Small Business, 
U.S. Senate. Washington, D.C. 

Dear Mr. Cherkasky: Enclosed please find a statement of the National 
Micrographics Association for use in conjunction with the November 16 meeting 
with members of the staff of the Select Committee on Small Business. 

NMA will be represented at the meeting by Kenneth Munro, Government Affairs 
Coordinator. Let me again thank the Committee and its staff for this opportunity 
to present our views. 
Sincerely, 

Warren A. Cole, 

President. 
Enclosure. 

Statement of the National Micrographics Association 
overview 

The National Micrographics Association represents some 260 Trade member 
companies and over 9,000 individual Professional members. Of our 260 company 
members, approximately 60 percent had annual sales of less than $10 million in 
r>77. NMA has a great interest, therefore, in the problems that face small busi- 
ness. 

The concerns and problems of small business in the micrographic industry are 
not unlike those faced by other industries. NMA wishes to thank the Select 
Committee on Small Business for giving us this opportunity to express our views 
and for allowing our industry to share the considerable expertise and experience 
of your staff. Although our concerns in regard to small business are many, we will 
restrict our comments to the two we feel are most important. 



112 

QOl KHNMKNT PROCUREMENT 

Many small businesses in the micrographic industry would like nothing better 
than to become more active in the area of government procurement. But they feel 
frustrated and alienated by the federal government's acquisition process, and 
many eventually come to the sad conclusion that to participate is just not worth 
the hassle. This is bad for the individual business, because it eliminates them from 
a p initially large market, and bad for the government, because it is denied the 
opportunity to acquire a good product at a reasonable cost. 

The problems that face small business in the procurement process need to 
receive more attention than they have in the past In fact, at the present time 
cern for small business in this area seems to be slipping. We refer to the 
current attack on the multiple award schedule system. Multiple awards offer 
small business — perhaps better than any other procurement method — the op- 
portunity to compete for government contracts on an equal basis. The beauty of 
i' ultip] ' awards for small business is that it allows it to compete for contracts 
on a smaller, local basis, rather than trying to compete for a contract on a 
rnment-wide basis. 
Despite this and many other advantages, multiple awards are currently under 
attack from a number of government officials. This attack is based not on some 
far-reaching and exhaustive study conducted by a government watchdog agency, 
but by a narrow and unrepresentative survey conducted by a member of the 
press. 

The point must be made on all of government that multiple awards are vital 
to small business, and should be allowed to take their rightful place among the 
several procurement methods which should be used by the government. If the 
government hopes to carry out its stated goal of shifting emphasis from design 
specifications to commercial product acquisition, multiple awards, which today 
constitute the largest procurement system for commercial items, must not be 
allowed to be destroyed. Without them, fewer and fewer small businesses will be 
able to participate in the procurement process. 

GOVERNMENT REGULATION 

The burdens imposed by the government in the acquisition process are repre- 
sentative of the larger problem of excessive government regulation, a problem 
which takes a particularly heavy toll on small business. 

Several small steps were taken during the 94th Congress to ease the regula- 
tory burden facing small business. Provisions of the "Omnibus Small Business 
Act of 1978'' which exempts businesses of ten or fewer employees from certain 
bookkeeping requirements of the Occupational Safety and Health Act and from 
civil penalties for first-instance violators if the inspections resulted in the cita- 
tion of less than ten violations demonstrate the concern of Congress in reducing 
this unnecessary burden. But much additional action needs to be taken. Passage 
by the Senate of the "sunset" bill gives hope to small business — indeed the 
entire business community — that this long overdue proposal will receive serious 
consideration by both Houses next year. 

Another encouraging note is contained in President Carter's Phase II anti- 
inflation plan, which places a heavy emphasis on examining proposed regulations 
for their inflationary impact. In light of a recent study by the Chase Manhattan 
Bank which placed the cost of government regulation at more than $100 billion 
in 1977, the need for such an emphasis is obvious. 

CLOSING 

The National Micrographics Association again wishes to thank the Select Com- 
mittee on Small Business for this opportunity to present our views. Tf we can 
ever be of any assistance to the members or staff of the Committee, please do not 
hesitate to contact either Bill Sullivan or Ken Munro in our Communications 
Department. 



Connecticut Small Business Federation. 

Hartford, Conn., November 9, 1978. 
Mr. William B. Ciierkasky, 
Executive Director, Select Committee on Small Business, Washington, D.C. 

Dear Btlt. : T certainly appreciate the invitation of the committee to attend 
the meeting on November 16, but find I will not be able to attend. 



113 

The tax bill which the President signed yesterday contains only one significant 
reform for small business, i.e. the graduated corporation income tax, and the 
President's veto on the other hand of the Omnibus Small Business Act would 
appear to place us all back to ground zero. It would seem that the unfinished 
business of the present Congress ought to be carried forward into 1979. 

It is very difficult to understand how the President could have ignored the 
work of so many of you who have worked so hard on developing programs and 
appropriate legislation to assist the small business sector. 

We will continue to do whatever we can at the grass roots level here in 
Connecticut to assist your committee in carrying on the work you have so ably 
started in the current Congress. 

Sincerely, 

Leon L. Lemaire. 

President. 



University of Wisconsin — Extension. 

Madison. Wis., November 10, 1978. 
Mr. William P>. Chebkasky, 

Executive Director, U.S. Senate, Select Committee on Small Business, Washing- 
ton, D.C. 
Dear Bill: The enclosed suggestions for legislative priority for the Senate 
Select Committee on Small Business has been submitted as requested by Senator 
Nelson in his letter of October 11, 1978. 

I hope the suggestions will be considered at your committee meeting of Novem- 
ber 16, and I will be happy to send additional information if it is needed. 
Thank you for giving me the opportunity to provide you with my thoughts. 

Sincerely, 

Robert W. Pricer, 
Director, Small Business Development Center. 

Incentives for Increased Small Business Exporting a Legislative 

Recommendation 

(By Dr. Robert W. Pricer, Director, University or Wisconsin Small Business 

Development Center) 

The Senate Select Committee on Small Business should give top priority to 
legislation which would encourage increased exporting by small business. This 
fact becomes obvious when it is recognized that 92 percent of all American firms 
sell only in the United States when approximately 93 percent of the world's 
population is elsewhere. This situation is detrimental to the economic develop- 
ment of the Nation and individual States for the following two reasons : 

1. Exports create employment. Conservative estimates link each $1 billion 
of U.S. exports to 40,000 American jobs. 

2. Foreign exchange reserves earned with American exports strengthen 
the dollar and help America pay its necessary imports. 

necessary legislative elements 

The experience of the University of Wisconsin Small Business Development 
Center lias demonstrated that the following four elements must be included in 
any legislation if it is truly to stimulate exports by small firms : 

1. Export tax incentive. — The legislation should provide a direct tax incen- 
tive for exporting. The incentive should be specifically directed to smaller 
firms and be easily understood by the owner/managers of small businesses. A 
suggested provision for new legislation is an income tax exemption on the 
first .$250,000 of export earnings. 

2. Outreach educational services. — The legislation should fund specialized 
international trade outreach continuing education programs for owners, 
managers, and allied business professionals from our nation's small busi- 
nesses with exporting potential. 

DISC has been criticized because most benefits of the program have accrued 
to firms with assets in excess of 100 million dollars. Based on our experience 
with SBDC clients, we believe that this is not due to a weakness in the DISC 
legislation. The problem, we feel, is that most small business owners/ 
managers do not know how to export and are not aware of the advantages 
of DISC. 



114 

Based on our experience, we firmly believe that any successful program 
for stimulating increased small business exporting must include educational 
services delivered near the location of the small businesses to be served. 
A suggested provision for new legislation would be the establishment of 
International Trade Development Centers based on the Small Business 
1 >e\ elopment Center Model. 

::. Export loan program. — The legislation should include a loan program 
with funds earmarked to finance export activities of smaller firms. Many 
small businesses find it difficult to secure adequate funds to meet normal 
business and expansion needs. This difficulty is especially acute for the small, 
rapidly-growing manufacturing firm which is often a prime candidate for 
export activity. 

The export loan program could be adequately handled by either the Small 
Business Administration or the Export-Import Bank. 

4. Risk sharing. — The legislation should contain a provision to lessen the 
risk to small businesses that are engaging in exporting for the first time. 
International markets represent both opportunities and added risks to small 
businesses. The risks of monetary fluctuations, different legal systems, docu- 
mentation problems, and collection and transfer of funds, to name a few. 
discourage many potential small business exporters from foreign market-. 
A suggested provision for new legislation is risk sharing by the federal 
government on a dollar-for-dollar basis for new export ventures by small 
business. This risk sharing could take the form of a direct tax credit to small 
business for 50 percent of all losses incurred on new export programs. 
It is important to emphasize that the experience of the University of Wiscon- 
sin Small Business Development Center has shown that a successful program for 
the stimulating of exports by smaller firms must include the four preceding ele- 
ments. Effective legislation must include all of these as exporting by small busi- 
ness is a direct function of (1) Incentive, (2) Exporting Knowledge. (8) Avail- 
able Financing, and (4) Reasonable Risk. If any of these factors are eliminated 
in future legislation it will not have its intended impact. 

f NEED 

In addition to providing additional jobs and strengthening the dollar, export 
legislation is needed to create a more viable small business sec-tor of our economy. 
The following three advantages of export trade will help increase sales, profits, 
growth, and stability of small businesses : 

1. Having customers abroad automatically introduces geographical diver- 
sification to demand for products, which tends to level out seasonal fluctua- 
tions, and further offers some natural hedge against the possible ups and 
downs of a single national (or regional) economy. Many testimonies have 
been heard from U.S. Small Businessmen who unequivocally credit their 
export markets for their firms' ability to weather prolonged economic dol- 
drums at home. 

Even where the presence of an international customer base has not played 
such a crucial role, the normal leveling of demand fluctuations which ex- 
porting tends to produce has. in turn, allowed for increased efficiencies in 
the utilization of existing facilities, manpower, and other resources. 

2. More absolute demand for its products allows a firm to spread research 
and development costs over a broader base, thereby increasing unit profit 
margins. 

Furthermore, overseas markets often add significant life to normal product 
cycles, leading to fewer product line changes with their attendant start-up 
and marketing expenses. 

3. SovereisTi nations occasionally attempt to "modify" their economies. 
Oompletelv free trade across national borders is more of an exception than 
the rule. This reality of international economic life obviously alters optimal 
global market strategies from time to time. Interestingly, when firm T T .S. 
price controls were mandated in the early 1070's, they did not extend ' 
overseas markets. Again, geographic diversification of product markets can 
offer various natural advantages to the international trader. 

The suggestions offered in this paper are based on the experience of the Univer- 
sity of Wisconsin Small Business Development Center with many small Wisconsin 
manufacturers. We are convinced that legislation based on the four elements 
recommended will greatly stimulate exporting by smaller firms. We stand ready 
to work with you to help develop legislation which will stand the test of time 
in service to small business and our nation. 



115 

Associated Retail Bakers of America, 

Hyattsville, Md., November 13, 1918. 
Hon. Gaylord Nelson, 

U.S. Senate, Select Committee on Small Business, Washington, D.C. 
Re Proposed Legislative Program for Senate Small Business Committee for 96th 
Congress. 
Dear Senator Nelson : In response to your letter of October 11, inviting us to 
submit an outline of our suggestions for the Small Business Committee's legis- 
lative program during the two years of the 96th Congress, we are pleased to offer 
the following ideas for your consideration. 

1. Implement Subcommittee's recommendation re food labeling. — The recom- 
mendations contained in the Report of the Special House Subcommittee on Small 
Business Problems, Representative Marty Russo of Illinois, Chairman, should be 
quickly and fully implemented, especially recommendations for preparing eco- 
nomic impact statements on new regulations and submitting them to the Small 
Business Committee (Food and Drug Administration's Food Labeling Regula- 
tion : Its Effect on Small Business, July 13, August 3, 1977 : March 15, 1978). 

2. Food surveillance legislation. — If a new bill to amend the Food, Drug and 
Cosmetic Act, comparable to H.R. 13967 in the old Congress (formerly H.R 
1035S), the Food Safety and Nutrition Act Amendments, is introduced in the 
96th Congress, the exemption contained in the old bill for single-unit retail food 
processors ought to be expanded to retailers who have more than one outlet but 
as to whom there is equal reason for exemption. 

"Appendix A" is a statement by our General Counsel suggesting two alternative 
wordings for such an exemption. 

3. Two tier regulatory system. — The seeming movement to exempt small firms- 
altogether from certain proposed regulations or at least to modify these regula- 
tions to fit the circumstances of small firms ought to be fostered by the Small 
Business Committee and applied in practice wherever the opportunity presents 
itself. Senator Bartlett's bill to exempt employers of 10 or less from OSHAs 
jurisdiction is an example. Especially ought the effort be made to relieve those 
who run their own businesses from much of the recordkeeping and paperwork 
they are now forced to do. 

4. Labor reform legislation. — If a bill to amend the National Labor Relations 
Act, similar to H.R. 8410 in the last Congress, is again introduced in the 96th 
Congress, members of the Small Business Committee ought to use whatever 
influence they can to see that the bill is fairer in its terms to employers, especially 
small ones, than was the previous bill. Specifically, provisions mandating elections 
for union representation within a set number of days, or allowing the NLRB to 
set the date, allowing union representatives access to employees whenever the 
employer addresses them, allowing the XLRB to impose a collective bargaining 
agreement on employers who are negotiating one for the first time and charged 
with negotiating "in bad faith," and setting new penalties ought to be opposed or 
made more equally applicable to both sides and less severe. 

5. Recommendations for minimum wage, social security. — We also recommend 
that increases in the minimum wage and social security payments (both the rare 
of tax and the base pay on which the tax is paid) be postponed or lowered some- 
what in 1979. Increases in the minimum wage affect our members in a particu- 
larly adverse fashion, forcing them to hire fewer people, shorten their hours of 
operation, not to hire inexperienced people, pay increased wages and operating 
costs across the board and charge more for their products. Amendments to the 
Fair Labor Standards Act which would allow the employment of more students, 
and of teenage non-students, at less than the minimum and otherwise ease the 
burden on small employers ought to be proposed by the Committee. For example, 
amend the FLSA to allow paying trainee employees a rate equal to 75 percent of 
the current minimum wage for the first six months of their employment. 

6. Corporate income tax: jobs tax credit. — The graduated income tax for cor- 
porations ought to be reconsidered and in its place substituted an amendment 
which would simply raise the ceiling on the amount of income taxed at the lower 
rate and lower this rate somewhat. Also, the jobs tax credit which was modified 
by the 95th Congress to apply primarily to hard-core unemployed should be re- 
stored to its original form and be available to an employer who adds any new 
emplovees to his work force. 

7. ''Illinois Brick" bill, — We favor a bill such as H.R. 11942. the "Illinois Brick" 
bill of the 95th Congress, which would allow indirect purchasers of goods from 
those who conspired to fix the prices of such goods to recover damages in the 
event a successful antitrust action w T ere brought. 



116 

8. Sugar support prices. — The Ofith Congress will have to take up the issue of 
- ipperts for sugar and ratification of the International Sugar Agreement 
We favor adequate supplies of sugar at reasonable prices, so that any bill pa 
by the new Congress must of course be fair to producers, but should not unduly 
burden sugar consumers and users, of whom hakers are very prominent. When 
net essary, we favor government action in the form of a subsidy to sugar growers, 
not in the form of Increasing the price to consumers. 

Vppendix of further issuet. — Finally, we attach for your and the Committee's 
leration a copy ("Appendix B") of ELBA'S "Declarations of Policy on 
National Affairs" as adopted by the membership at our latest annual convention 
in Boston, April 18, 1978. 
Respectfully, 

Gerard P. Panaro, 
Associate Director, Government Affairs. 

Appendix A 

ement by yvllliam a. quinlan, general counsel. retail bakers of 
America, to the Subcommittee on Health and the Environment Committee 
on Interest and Foreign Commerce, U.S. House of Representatives 

The Retail Bakers of America, national trade association of the retail baking 
industry, respectfully proposes that the bill II. R. lOSHS, the "Food Safety and 
Nutrition Amendments of 1978," be amended (a) to perfect the exemption of 
retail establishments, and (b) to make technical and clarifying changes in other 
provisions. 

Sj eciflc suggestions and reasons for them are offered below. 

THE EXEMPTION OF RETAIL ESTABLISHMENTS 

The bill applies to "food processors," and the definition of that term provides 
in parti at page 20, lines 13-16, that "the processing in an establishment of food 
for retail sale in such establishment does not make the owner or operator of such 
ilishment a food processor for purposes of this act." 

That language would exempt retail bakers, retail confectioners, retail grocers 
and other retailers who have only one store. It would not, however, exempt 
those who have two or more stores and who prepare food at one of them for sale 
in the other (s), or prepare food at a separate location for sale in both or all of 
them. Yet the practical considerations and reasons for exemption are the same 
for many such retailers, as for those with one store. 

We assume that the Subcommittee would not want to exempt all processing 
by retailers at establishments other than those at which the retail sales are 
made, since that would mean exempting mass-production and packaging by 
food chains in their own canneries or other food factories comparable to those 
of wholesale food manufacturers. 

However, a limited exemption of processing by a retailer at one location for 
retail sale by him at another location (limited to operations and practical con- 
siderations which are essentially the same as those of a single store) is neces- 
>;,;•;>- if injustice and impracticability are to be avoided. 

For example, the operations of retail bakers are essentially the same whether 
they have one store or more than one. They bake a very great and changing 
variety of products, with many types of doughs or batters, fillings, icings, sizes 
and shapes. The products are handcrafted, in relatively small batches, rather 
than standardized and mass-produced, and most of them are displayed for sale 
unpackaged in the bakers' showcases, and placed in a bag or carton only after 
purchase by the consumer. A few special products may be pre-packaged by the 
baker, including some in transparent, shrink-wrap, but most retail bakery prod- 
ucts must be displayed unpaekaged so as to he fully visible for inspection by the 
consumer and to retain the quality and characteristics expected of retail 
bakeries. A retail baker with more than one store transports his unpackaged 
products on trays and racks in his own vehicles and places them in his show- 
cases just as does the retail baker with one store. In place of a separate store the 
retnil baker may operate a leased department in a department store or other 
retail establishment, displaying his products in the same way. 

In both cases baking is done daily or more frequently and the baker has com- 
plete prossession and control of the products at all times until they are selected 
by. bagged or boxed for, and placed in the hands of the consumer. These opera- 
tions and products are in no way comparable to those of wholesale bakers or 



117 

other wholesale food manufacturers whose products are mechanically produced, 
packaged, labeled, sold to and placed on the shelves of grocers for resale. There is 
no need, nor would it be possible, to subject retail bakeries to the same regulations 
as wholesale bakeries, including the requirements of food coding, distribution 
records, registration, dating, and nutrition labeling. 

We therefore suggest that the definition of "food processor" be amended, in 
lines 13-16 on page 20, by inserting language to make it read in part : "the 
processing in an establishment of food for retail sale in such establishment, or 
for retail sale by the processor in another retail establishment or department 
thereof in which most foods are unpackaged until after selection by the pur- 
chaser, does not make the owner or operator of such establishment a food 
processor for purposes of this act." 

An alternative amendment to serve the same purpose would be the following: 

Section 902 of the Federal Food, Drug, and Cosmetic Act (31 U.S.C. 392 ) is 
amended by adding at the end thereof the following new subsection : 

"The provisions of subsections (o) and (p) of section 403 and the provi- 
sions of sections 413, 414 and 415 of this Act shall not apply to bakery, con- 
fectionery or other foods which are manufactured wholly or partly by handcraft 
methods and sold directly to ultimate consumers by the manufacturers thereof 
in retail establishments or departments in which most foods are unpackaged 
until after selection by the purchaser, or to the manufacture or other processing 
of such foods, whether packaged or unpackaged, at the same or separate establish- 
ments." 

TECHNICAL AND CLARIFYING CHANGES 

The following technical and clarifying changes in the bill are also respectfully 
suggested (references are to sections of the Act as amended) : 

Section 413. In line 19 on page 3, change "food processor of food" to read "food 
processor". 

Section 403 (o). In line 1 on page 7. insert language to make that line read "(o). 
If in a package or other container, and placed therein by a food processor, unless 
the". 

Section 403 (o). In line 21 on page 14 reletter this subsection to eliminate 
duplication with the other Section 403 (o) which begins in line 1 on page 7. Also 
insert a reference to the new letter in our suggested alternative amendment to 
Section 902 of the Act, above. 

Section 403 (p). In line 21 on page 17 insert language to make lines 20 and 21 
read "(p) If a food for human consumption and in package form, packaged by a 
food processor, unless its label bears such nutrition information relating". 

This opportunity to offer suggestions is appreciated and we would be happv to 
provide any further information desired by the Chairman, Members or Staff 
of the Subcommittee. We also renew our request for opportunity to present oral 
testimony at further hearings. 

Appendix B 

Declaration of National Policies of the Retail Bakers of America 

Associated Retail Bakers of America. 

Hyattsville, Md., April IS. 1978. 

ARBA DECLARATIONS OF POLICY ON NATIONAL AFFAIRS 

(As reaffirmed on April 10, 1978, by the 60th Anniversary Convention-Exhibi- 
tion in Boston, Massachusetts.) 

Agricultural commodities. — We favor effective measures, including reserves 
or export controls, to assure adequate supplies of wheat and other food com- 
modities for United States consumers. 

Sugar legislation. — Any legislation to replace the inflationary former Sugar 
Act of 1948 should protect the interests of sugar users and consumers by assur- 
ing adequate supplies at reasonable prices. 

The right to work. — Under our free institutions no employee or employer should 
be forced, by threatening loss of his livelihood, into joining any organization. We 
favor and support section 14(b) of the Taft-Hartley Act, which makes it possible 
for the states to enact right-to-work laws outlawing compulsory union mem- 
bership. 

Labor reforms. We favor further labor reform legislation, to put unions under 
the antitrust laws, make strike violence a federal crime, ban the use of union dues 



118 

or assessments for political purposes or defense of criminal proceedings against 

union officiate, outlaw strikes which affect public health and safety, and outlaw 
all stranger picketing. 

Federal wage-hour regulation. — We oppose amendments to the Federal Wage- 
Hour haw, or so-called Pair Labor standards Act, including the amendments 
adopted In 1961 and 1906, which limit, on a basis of sales volume, the specific 
exemption, provided in section 13(a) (2), (3) and (4) of that, Law, of local 
retail and service establishments Including manufacturing retail establishments 
such as neighborhood bakeries. The principle of Federal regulation based on 
arbitrary sales figures is unsound and, unless revoked, will lead to Federal bu- 
reaucratic control of all businesses, however local. Including retail bakeries. We 
also oppose any excessive minimum hourly wage rate, or any "indexing" of the 
rate by providing that it shall change automatically with statistical indices, 
which would aggravate the vicious circle of inflation. 

Occupational safety and health regulations. — We recommend a major over- 
hauling of the Occupational Safety and Health Act, which would : 

1. Rescind the perfunctory adoption, as mandatory safety and health 
standards, of so-called consensus standards published by private organiza- 
tions, and require instead that every standard be proposed, considered and 
justified under adequate procedural safeguards. 

2. Revoke the authority of the Secretary of Labor to assess penalties, and 
leave that to the courts. 

3. Eliminate the civil penalties, which apply even to innocent and insig- 
nificant alleged technical violations. 

4. Simplify standards and other reguations. 

5. Provide appropriate exemptions for small businesses. 

(i. Provide for reasonable opportunity to eliminate alleged violations with- 
out penalty, after warning notice. 

Unemployment compensation and experience rating. — We oppose Federal 
legislation that would establish compulsory benefit standards under state un- 
employment compensation laws and lead to the elimination of experience rating 
under state payroll taxes. 

Food-drug regulations. — While supporting food-drug authorities in eliminating 
false or misleading point-of-sale material, labels or advertising, we insist upon 
the freedom of retail bakers to produce and truthfully sell variety products to 
meet consumer preferences, without interference from regulations as to product 
names and standards. We deplore and oppose subjecting retail bakeries to 
inappropriate and unrealistic regulations, including registration, "surveillance," 
labeling and "GMP" regulations, wdiich would harass retail bakers and increase 
costs without benefit to their customers. 

Sales by manufacturers to consumers. — We oppose legislation to prohibit sales 
hy manufacturers directly to consumers, to the extent that it might prohibit or 
raise any question as to operations of retail bakeries, which are the very per- 
sonification of independent small business and free enterprise that such legisla- 
tion is intended to protect. 

Fnfair and destructive price discriminations. — We oppose weakening amend- 
ments to the provisions of the Robinson-Patman Act against unfair and destruc- 
tive price discriminations which may injure competition, including discrimina- 
tions against retail bakers on ingredients, supplies and equipment. 

Destructive price cutting. — We favor effective legislation to prohibit destructive 
price cutting and to provide for private treble damage suits by those injured by 
such price cutting. 

Private truck operations. — We oppose any curtailment of or interference with 
the right of retail bakers, their suppliers and others to operate trucks as an 
incident to their own non-transportation businesses, as recognized in the "pri- 
mary business test" for distinguishing between private and for-hire truck 
operators under the Interstate Commerce Act. 

Canadian bread. — We favor Government action to stop duty-free imnorts of 
bread produced in Canadian Bakeries, which are not under or affected by the 
same regulations as bakeries in the United States and which, therefore, as a 
result of present policy of our Government are subjecting bakers in the United 
States to unfair and destructive competition. 

Small business tax relief.— We favor legislation to relieve the disproportion- 
ate and destructive burden of the Federal income tax on smaller businesses, and 
thereby stimulate all business, employment and taxable incomes, by allowing 
more plowing back of earnings through limited tax deductions or credits for 
increased investment in business assets. In addition to income tax relief for 



119 

both incorporated and unincorporated enterprises, we favor increases, to allow 
for inflation, in the exemptions from estate and gift taxes and liberal payment 
terms for those taxes so as to relieve a burden causing forced sales by heirs of 
small business owners. 

Death tax on small businesses. — We oppose taxation of unrealized appreciation 
of capital assets at time of death, which would force many small businessmen 
of their heirs to sell or liquidate their businesses and further accelerate the 
trend toward business concentration and destruction of competition and 
opportunity. 

Federal sales tax. — We oppose a Federal sales tax, especially as applied to 
food, but in any event because in the long run it would not reduce other taxes ; 
but we would end up with all the taxes we have now, and a Federal sales tax too. 

"Value-added" tax. — We oppose new forms of taxation such as the "value- 
added" tax, which would ultimately provide no relief from excessive and unfair 
burdens of present taxation but instead only add to total taxation, encourage 
and increase wasteful and needless government spending, burden and discourage 
consumption of commodities, fall most heavily on consumers least able to pay, 
and discriminate against retail bakeries and other businesses which by their 
nature add great value to the materials or products they process or distribute. 

Emergency business regulations. — We oppose price and wage controls as 
unnecessary and harmful in time of peace. We urge that if and when it might 
become clear in a war emergency that such extreme measures are essential, it 
be recognized that piecemeal price or wage control is impossible, that one man's 
wage or price is another man's cost, that there cannot be control of only some 
prices, without simultaneous control of all prices, and wages, with only specific 
and specifically justified exceptions, and accordingly that such controls, if any 
must be across-the-board. We urge that no legislation providing authority for 
such controls have an expiration date later than two years from the date of 
enactment. 

We favor requiring that Government agencies and officials consult industry 
representatives, including trade association representatives, in the formulation 
of emergency regulations of industry. 

Retirement plans. — We favor continuing income tax deduction for amounts 
paid into voluntary retirement plans for unincorporated businessmen and other 
self-employed persons and their employees, and increasing the allowable maxi- 
mum for such deductions. 

Civil penalties. — We oppose "civil penalties" as a harsh, oppressive and un- 
democratic means of enforcing Government regulations. 

Wheat foods promotion. — We favor voluntary programs for promotion of wheat 
foods. We oppose legislation providing for Government intervention in or con- 
trol of such programs, including taxation for that purpose, whether called 
"assessments" or by whatever name. 



Independent Bankers Association of America, 

Washington, D.C., November l.' f , 1978. 
Hon. Gaylord Nelson, 

Chairman, Select Commitee on Small Business, 
RaiiMm Senate Office Building, Washington, D.C. 

Dear Senator Nelson : Thank you for your letter of October 11. 1978 inviting 
small business organizations to meet with the Committee staff at 9:30 a.m.. 
Thursday, November 16. 1978 to offer their views as to what the Committee's 
program might include for the two years of the 96th Congress. Representatives 
of this association will be pleased to attend the meeting. 

With respect to your request that written recommendations lie sent to you. 
we outline below some issues of concern to our membership which we believe 
should be addressed by the 96th Congress. The problems of small business are 
of considerable concern to our banks since they comprise the small business see- 
tor of commercial banking and the markets they serve are comprised largely 
of small businesses, farmers and consumers in rural and suburban areas. More 
than 80 percent of our banks are small, having less than $25 million in assets 
and are located in towns of less than 10.000 population. 

Since IBAA member banks constitute an important source of credit for small 
business, their survival as viable independent institutions devoted to the needs 
of the communities they serve should be a matter of concern to your committee. 



120 

The survival of small independent community owned banks depends in large 
measure on the ability of the owners of these banks to transfer ownership to 
qualified purchasers within the community. To facilitate such transfers of own- 
ership, relief from existing regulatory and tax constraints are needed. First, re- 
lief is needed from the regulations promulgated by the Federal Reserve Hoard 
under the Bank Holding Company Act which imi>ede compliance and delay the 
formation of one bank holding companies by small banks. The one bank holding 
company provides an effective means for transferring ownership of small banks 
to qualified owners in the same community. To overcome these difficulties, small 
banks with assets under 850 million (indexed to account for inflation) should 
be exempted from the one bank holding company provisions of the Bank Holding 
( 'oinpany Act. 

Second, tax relief along the lines of the Haskell bill is needed to permit the 
deferral of the capital gains tax by the owners of small banks in order to en- 
courage the transfer of ownership to qualified purchases within the community 
served by the hank. Failure to make this change in the tax laws will accelerate 
the acquisition of small banks by bank holding companies through an exchange 
<>f stock which postpones the impact of the capital gains tax and will result in 
the loss of community control of the acquired bank. 

Third, one bank holding companies should be exempted from the Personal 
Holding Company Act which imposes very heavy tax penalties on entities which 
are, in essence, family holding companies. Banks are not subject to these heavy 
penalties if they are owned by a i>ersonal holding company. However, rhey are 
taxed if a personal holding company owns a one bank holding company instead 
of the bank. 

The persistent expansion of federal regulation of business impacts more heavily 
on small rather than large business by increasing costs in the face of rampant 
inflation. Small business encounters serious difficulties in obtaining redress for 
grievances which stem from excessive regulation. There is. therefore, need for 
establishment of a channel of communication through which small business 
could seek relief from the myriad of regulations pouring out of the regulator 
agencies which are particularly oppressive. 

There is urgent need for a full examination and assessment of policies pursued 
by the Congress and the federal bureaucracy which change the competitive 
balance among competing institutions to the detriment of small business. Giving 
certain types of agricultural and consumer cooperatives favored treatment has 
the potential for injuring many small businesses which compete in the same mar- 
kets. Similarly, the competitive position of small financial institutions is being 
eroded by federal regulatory actions which seek to homogenize all depository 
institutions, with tie result that specialized institutions will no longer be dedi- 
cated to serving the particular needs of the markets for which they were origi- 
nally created. 

Inflation has had a serious impact on the ability of rural banks in meeting 
credit demands in their trade areas. Whereas deposits haA T e made appreciable 
gains, the capital position of many banks has shown a steady decline. This con- 
dition stems from the shrink in retained earnings and inability on the part of 
small banks in attracting investment capital. As a consequence, credit lines re- 
quired of large farming operations and business enterprises frequently exceed the 
local bank's credit capacity. Many of these customers are forced to seek out 
assistance through the Farm Credit Administration and regional banks. 

Our association has found that federal intermediate credit banks have not 
been willing to make intermediate credit available to the majority of the small 
rural banks and nonmember banks do not have access to the Federal Reserve 
discount window. If the smaller institutions are to continue to provide credit 
and support the rural economies, some concerted effort must he made to correct 
this problem. 

These are a few of the problems affecting small business which we believe the 
Small Business Committee should address during the 00th Congress and we trust 
this will assist you in framing your program for the next two years. 
Very truly yours, 

Ivan D. Fugate, 

President. 



121 

National Oil Jobbers Council, 
Washington, B.C., November Uf, 1978. 
Hon. Gaylord Nelson, 

Chairman, Smatc Select Small Business Committee, 
Washington, D.C. 
Attention : Bill Cherkasky. 

Dear Mr. Chairman : Thank yon for the opportunity to submit comments on 
the Small Business Committee's legislative agenda for the 96th Congress. 
Attached are our written recommendations in six general areas: 

(1) Energy Policy ; 

(2) Dual Distribution Marketing; 

(3) Taxation; 

(4) Environmental Issues; 

(5) Regulatory Flexibility Act, and 

(6) Equal Access To Courts legislation. 

By necessity, the discussion of these items has been brief. Further details are 
available in each of the areas discussed. 

NO.TC has appreciated the opportunity to work with the staff of the Senate 
Sniall Business previously and hopes the 96th Congress will be productive for all 
small businessmen. 
Respectfully, 

Phillip R. Chirholm. 
Director of Legislative Affairs. 

Recommendations to Senate Small Business Committee on Legislative Agenda 

for the 96th Congress 

gasoline deregulation 

Aii important issue to small business petroleum marketers is the removal of 
price and allocation controls on gasoline which have strangled marketers for 
several years. While refiners have prospered under these complex regulations, 
marketers have seen their flexibility — their only advantage in competition with 
their refiner suppliers — eroded. A marketer is virtually locked into paying 1978 
bills with 1972 sales, an intolerable position for almost any small businessman. 

These regulations have become such a burden that marketers throughout the 
country have joined a class action law suit (Olympian v. Schlesinger) against 
the Department of Energy asking that these regulations be stricken. Two of the 
contentions of this suit are that FEA retroactively enforced its regulations against 
independent marketers in violation of Section 7(K) of the FEA Act of 1974 and 
that FEA failed to submit its recordkeeping requirements to the General Account- 
ing Office as required under the Trans-Alaskan Pipeline Act of 1972. 

This suit, however, represents a very slow process. Marketers can be relieved of 
these onerous regulations more quickly if the Department of Energy proposes 
gasoline deregulation and if the Congress does not pass a resolution of dis- 
approval. Once DOE proposes deregulation, NO.TC hopes that members of the 
Senate Small Business Committee will tell their colleagues of the problems these 
regulations present for small business and urge that they reject a resolution 
of disapproval. 

NATIONAL ENERGY ACT 

-Implementation of the National Energy Act will be a major priority in 1979. 
Since the various bills provide wide discretion to the Department of Energy, the 
interests of the small businessmen must be protected. For example, the Presi- 
dent's original proposal on home energy audits was changed by the Congress to 
prohibit utilities from doing the actual installation or financing the installation 
of energy conservation equipment except under certain specific circumstances. 
This prohibition would provide small businessmen the opportunity to do the 
necessary work. In addition, the bill prohibits utilities from inspecting furnaces 
in homes fired by a fuel other than a fuel provided by the utility without written 
permission from the homeowner. Hopefully, this will reduce the likelihood that 
the electric and gas utilities will engage in anti-competitive practices to the detri- 
ment of small fuel oil dealers as well as lessen the potential for deceptive trade 
practices to the detriment of consumers. 



122 

1 )()E's implementation of these provisions should be monitored closely to insure 
thai thfl Congressional intent relative to small business involvement in the energy 
audit program is carried out. Implementation of other aspects of the National 
Energy Act should also be monitored to insure equitable treatment for small 
business. 

NATIONAL ENERGY PLAN II 

The President is expected to submit early in the next Congress National Energy 
Plan— II (NEP-II). The impact of these provisions on small business in all indus- 
tries should be examined. 

REFINERY POLK Y 

The next Congress is also expected to develop a comprehensive refinery policy 
which will attempt to encourage increased refinery expansion while removing 
some of the inequities prevalent under the existing entitlements program. While 
NOJC represents no refiners directly or indirectly, refinery policy is critical to 
the interests of small business petroleum marketers. Any policy which is arrived 
at must necessarily encourage refiners to refine gasoline and healing oil and nor 
subsidize the entry of refiners into direct marketing. 

Under the existing entitlements program some refiners, through a special bias, 
are provided with a competitive advantage, a direct government subsidy, which 
has been hindering competition and threatening the viability of individuals whose 
sole petroleum industry operation is marketing. 

INCREASED PRODUCT STORAGE 

The NOJC has argued consistently that the Strategic Petroleum Reserve should 
include expanded petroleum product storage. Relying solely on crude storage 
may prove to be shortsighted in instances where America's refining capacity is 
threatened by war or other disasters. 

Increased product shortage should be encouraged through the availability of 
low interest loans from the Small Business Administration. Absent such govern- 
ment assistance petroleum marketers, because of increased inventory costs, will 
be unable to finance the necessary expansion. In addition to serving the national 
interest, SBA loans for expanded product storage would give small businessmen 
a chance to participate in a program critical to America's national interest. 

The Senate Small Business Committee in its consideration of the Fiscal Year 
1979 SBA Authorization should approve a specific authorization for SBA loans 
for increased petroleum product storage. 

Dual distribution marketing 

Independent marketers have long been concerned with a problem which may 
face small businesses in other industries but which is prevalent in the petroleum 
industry — dual distribution marketing. Marketers generally do not object to their 
supplier selling at retail in the same market the jobber serves except when the 
supplier uses profits from another integrated operation to subsidize bis retail 
prices. Refiner subsidization is a major problem in the petroleum marketing 
industry. 

While the Robinson-Patman Act prohibits price discrimination among a class 
of customers, it does not address internal transfers where a refiner may transfer 
product to a direct operated service station at a price cheaper than he would 
charge a similarly situated station operated by an independent dealer. The Senate 
Small Business Committee should investigate such internal transfers and the 
extent to which stations owned and operated by refiners are being subsidized 
by upstream profits. 

A point of departure for such an investigation and subsequent legislative action 
is the anti-subsidization provision approved by the Senate Energy Committee 
in March 1978 as part of the Petroleum Marketing Practices Act. This provision, 
which was later deleted on the Senate floor, would have banned refiner subsidi- 
zation by granting marketers a private right of action in cases of suspected sub- 
sidization. The novelty of this particular proposal was that it recognized the 
difficulty of a private right of action if the refiner could literally use boxcar loads 
of records to "prove" it was not subsidizing. To avoid this result, the provision 
shifted the burden of proof to the refiner if either the refiner's transfer price to 
himself was less than the marketer's buying price or if the refiner's transfer price 
plus the marketer's costs of operating a station exceeded the refiners street price. 

In place of the provision, the Congress approved an 18 month DOE study of 
subsidization. DOE is currently performing the study and the Small Business 



123 

Committee should use its authority to insure that refiners cooperate fully with 
DOE requests. 

Taxation 

NOJC feels that the tax code could he used as an effective stimulus for small 
business capitalization. The Revenue Reduction Act of 1978 contained several 
provisions which will greatly aid small businesses including a further phasing-in 
of corporate income tax rates. 

NOJC feels, however, that several other changes should be enacted. 

EMPLOYEE-INDEPENDENT CONTRACTOR ISSUE 

The Revenue Reduction Act addressed the controversy created by the Internal 
Revenue Service's arbitrary reclassification of independent contractors as em- 
ployees. The newly defined "employer" has often been asked to pay three years 
back withholding taxes as well as FICA and FUTA. 

The solution provided in the Revenue Act, however, is only interim relief. It 
provides amnesty for persons who had "reasonable basis" for classifying individ- 
uals as independent contractors, extends the reasonable basis provision through 
December 31, 1979, and places a moratorium on IRS issuance of revenue rulings 
until January 1, 1980. 

The 96th Congress should look at this issue early in 1979 so that the standards 
for classification of individuals are made clear. 

Gasoline jobbers are especially concerned with this problem. Many service 
station dealers have been reclassified as employees thus presenting problems not 
only for the jobber who must raise the necessary capital to pay back taxes, but 
for the service station dealer who may view himself as a small entrepreneur but 
who has been told by the IRS that he is an employee. 

SUBCHAPTER S 

The Revenue Reduction Act made several positive changes in Subchapter S 
requirements. An amendment not approved, however, was one recommended by 
the President which would have permitted businesses which inadvertently lose 
their Subchapter S status to requalify as a Subchapter S corporation without 
waiting the required five years. 

NOJC urges not only that this provision be approved but that it be expanded to 
permit small businesses even greater flexibility to switch to and from a Sub- 
chapter S designation. 

ACCELERATED DEPRECIATION 

NOJC strongly supported the three year accelerated depreciation amendment 
offered by Senator Nelson and adopted by the Senate to the Revenue Reduction 
Act. Small businessmen need such rapid write-offs especially with expanded 
capital expenditures required by EPA and OSHA requirements. 

PAYMENT OF FEDERAL EXCISE TAX ON GASOLINE 

Some gasoline jobbers collect and remit the four cents Federal excise tax on 
gasoline. A marketer who fails to collect and remit the tax but instead pays the 
tax to his supplier, is paying taxes on every gallon of gasoline even those the 
marketer loses through shrinkage, etc. 

A marketer who collects the tax must remit it within 9 days of the semi- 
monthly period. For example, taxes must be paid by November 24, for gallons sold 
by November 15. This payment schedule is totally unrealistic for an independent 
marketer who must collect sales for all of his stations in a very short period 
of time. 

Failure to remit the tax on time or if the gailonage is underestimated by as 
much as ten percent, the marketer is assessed a ten percent penalty. 

NOJC recommends that the payment period be lengthened to twenty days after 
the semi-monthly period. This would provide marketers an adequate time to 
collect accurate gallonage figures. 

Environmental issues: 

Until recently the brunt of compliance with Federal environmental regulations 
has been on larger industries. Now EPA requirements are becoming more and 
more applicable to smaller businesses. This increasing burden on smaller com- 
panies has recast the essential question surrounding environmental regulations. 



124 

Instead of asking what the cost of a clean air regulation is to society, the ques- 
tion for small husinesses is "What is the effect of this regulation on the survival 
of rhe relevant small business?'' This question must be raised since the basic 
assumption underlying environmental regulation, that the costs can be passed 
through to consumers, may not be applicable for small businesses. 

VAPOR RECOVERY 

Petroleum jobbers understand clearly the problem of not being able to pass- 
gh the cost of environmental regulations. Marketers in many areas are 
currently faced with installing costly equipment designed to recover vapors 
emitted in all stages of the petroleum distribution process. But, because refiners 
a n pass the costs through over more gallons or through more facilities, marketers 
in direct competition with refiners will be forced to absorb much of the cost. 
In addition, some marketers may close facilities which would no longer be cost 
effective if expensive retrofit equipment is required. 

If these facilities close, not only will the jobber be injured, but the customers 
1 out of that facility (lumber yards, bakeries, agricultural accounts) may 
be damaged as well. 

OTHER ENVIRONMENTAL ISSUES 

Tbere are other environmental issues concerning marketers including the 
is<ue of fuel switching. Fuel switching is the term describing the consumer 
predilection to switch from unleaded to leaded gasoline in cars requiring only 
unleaded fuels. Currently, the service station dealer is the enforcement agent 
for this program. If a dealer puts leaded gasoline in a car requiring unleaded, 
even if the label identifying the car as requiring unleaded is removed and the 
iill restrictor modified, he is subject to a $10,000 fine. The dealer can be fined 
even if a consumer puts leaded gas in a car equipped with a catalytic converter 
at a self-service station. NO.TC feels service station dealers are not policemen 
and the penalty must be borne by the individual most willing to violate the 
law — the consumer who makes the necessary modification to his car. 

XOJC recommends that the Senate Small Business Committee hold oversight 
hearings on EPA's enforcement of environmental regulations against small 
businessmen. The focus for these hearings should be the extent to which EPA 
assesses the impact of its regulations on small businesses. 

/,'< gulatory Flexibility Act: 

XOJC strongly supports the concept of the Regulatory Flexibility Act. Mar- 
keters, who have been the victims of some of the most inequitable regulations 
issued by federal bureaucrats, believe strongly that regulations should be writ- 
ten to fit the size of the regulated. The same petroleum price and allocation 
regulations that apply to Exxon should not apply to a small distributor. 

XOJC urges that this legislation be a major priority and that the Senate 
Small Business Committee working with the Senate Judiciary Committee re- 
port this legislation to the Senate floor early in the 96th Congress. 

EqiKil access to courts: 

XOJC also urges rapid action on Equal Access to Courts legislation. Small 
businessmen must have the opportunity to dispute grievances with the Federal 
u r rwernment in the courts. Currently that opportunity does not present itself 
given the infinite resources of the government and the limited resources of the 
small businessmen. 

XOJC has learned this painful lesson in its current class action law suit 
against the Department of Energy. The government has consistently delayed 
the progress of the suit and, as a result, has seriously depleted NOJC's financial 
resources. Small businessmen who successfully sue the government should be 
awarded attorney's fees. 

Summary: 

There are many other issues of concern to small business petroleum marketers. 

These include inflationary increases in minimum wage laws, proposals that 

rage the unionization of small business, the red tape involved in receiving 

an SBA loan, overlapping Federal requirements, and coordination between 

ral agencies. 

XOJC looks forward to working with the Senate Small Business Committee 

during the 96th Congress and hopes that 1979 and 19S0 can be very productive 

for small businessmen. 



125 

Steis. Mitchell axe Mezinls. 
Washington, h.c. November 14, 1978. 
Hon. Gaylord Nelson, 

Chairman, Select Committee on Small Business, U.S. Senate, Washington, D.C. 
Attention : Mr. William B. Cherkasky, staff director. 

Pear Mr. Chairman: Many thanks for your letter of October 11, 1978, con- 
cerning the agenda for the Select Committee on Small Business which will be 
considered during the 96th Congress which will convene in January, 1979. 

We greatly appreciate the opportunity to submit suggestions that could be 
considered at the meeting scheduled for November 16, 1978. Toward this end, I 
would like to offer the following suggestions. 

During the past several months, the Small Business Legislative Council has 
been working on a series of proposals relating to antitrust and trade regulation. 
These proposals have considered the effect of recent decisions on small business 
and the impact of trade regulation rule proceedings by the Federal Trade Com- 
mission on small business. I am informed by John Lewis of the Small Business 
Association that you have received these various position papers and they will 
be considered by the Committee during the 96th Congress. 

It should be emphasized that at the present time, the Federal Trade Commis- 
sion is expanding substantial portions of its appropriation on trade regulation 
rule proceedings which will have the effect of regulating what is essentially small 
business. For example, the FTC has rules pertaining to funeral directors, hearing 
aid dealers, automobile dealers, loan companies, physical fitness centers, and 
vocational schools. This is not an all inclusive list, but demonstrates that the 
target of the rulemaking proceedings are small business and the rules proposed 
are innovative, unprecedented and still untested as to their effect on the well- 
being of these businesses. 

When the Magnuson-Moss Bill was approved providing for rulemaking by the 
Federal Trade Commission, Congress instructed the Commission to consider the 
effects of a proposed rule on small business before it becomes final. This was 
included in the legislation because of the concern by Congress that proposed 
rules may be enacted which would have an adverse effect on small business 
However, the problems anticipated by Congress were not met by the Federal 
Trade Commission because it does not announce with a proposed rule any find- 
ings or otherwise consider the impact on small business. If the Federal Trade 
Commission instituted a procedure of designating issues concerning the impact 
of a proposed rule on small business, such issues could be the subject of explora- 
tion during the rulemaking proceeding. This is not done. After the rulemaking 
proceeding has been completed, the Federal Trade Commission in announcing the 
final rule may very well make statements concerning the effect they believe the 
rule will have on small business but this is not a subject of consideration during 
the actual hearing. 

We believe that this represents a serious defect in the rulemaking proceeding 
As I indicated, the majority of the rulemaking proceedings involve small busi- 
ness and during each proceeding representatives cf this group have testified that 
they are being made the subject of far-reaching rules which have not been tested 
and will undermind the foundation of their businesses. More specifically, the 
staff of the Federal Trade Commission has proposed that in many transactions 
consumers be permitted to unilaterally cancel contracts and receive refunds 
whenever they are dissatisfied. To be sure this is a very one-sided and satisfying 
remedy for an unhappy purchaser when they can simply return any item at any 
time or cancel any contract. However, when a rule of this kind takes effect, the 
balance is totally shifted to the consumer and the seller which is usually a small 
businessman must suffer the consequences. For example, we have many rules 
dealing with warranties on automobiles. These rules provide that a manufac- 
turer must ensure that his automobile is satisfactory and will perform as repre- 
sented. But the consumer does not have a right to simply return the automobile 
after it has been used for a year. The manufacturer must warrant the car and 
make necessary repairs, but it would be unthinkable to require a manufacturer to 
take an item back for any reason at any time merely because the consumer had 
determined that they are no longer interested in the product. 

Many of the rules proposed by the Federal Trade Commission involving small 
businesses embody this concept of "self help." Consumers are permitted to cancel 
contracts for any reason at any time and the small businessman is left with the 
financial burden which ultimately must be passed on to other consumers. For 
example, the FTC has a rulemaking proceeding involving health spas. The pro- 

40-287—79 9 



12G 

posed rule would permit spa members to cancel their contract for any reason 
and obtain a pro-rata refund even though costly services are rendered during the 
first months. This rule, according to many of the witnesses testifying could elimi- 
nate small competitors from this industry. 

It is for this reason that I believe that the Select Committee on SiikiII Busi- 
ness should consider the rulemaking procedures employed by the Federal Trade 
Commission and the effect of such rules on small business. In order to ensure 
that the rulemaking proceedings will flush out all the ramifications of a rule 
there should be a requirement that the hearings develop analytical and economic 
data which will disclose or project the effect of a rule on the businesses in- 
volved. It should not be enough to merely state that the rule has a "self help " 
effect. There must be a balance and if business is to survive, there should he 
some consideration of the effects of a proposed rule during the rulemaking 
proceeding. 

I am sure that the Small Business Legislative Council, of which I am a mem- 
ber, will be glad to supply complete information concerning this proposal. 1 
also will be glad to provide any additional information that you may desire. 

With kind regards. 



Sincerely yours, 



Basil J. Mezines. 



Association of Physical Fitness Centers, 

Washington, D.C., November 14, 191S. 
Hon. Gaylord Nelson, 

Chairman, Select Committee on Small Business, 
U.S. Senate, 
Washington, D.C. 

Dear Senator Nelson: I greatly appreciate your invitation to express the 
views of my organization at your committee meeting scheduled for November 16, 
1978. Unfortunately, a previously scheduled engagement, which will take me out 
of the city, precludes my appearance on that date. However, I did want to take 
the opportunity, in writing, to express the views of the small businessmen we 
represent. It is extremely important to us that the programs of the J)6th Con- 
gress, as well as the agenda of the White House Conference on Small Business, 
take into consideration the problems now faced by our industry. 

Our Association, The Association of Physical Fitness Centers, represents the 
owners and operators of full service physical fitness centers across the United 
States. These centers, owned and operated by small businessmen, provide mil- 
lions of middle class Americans with the opportunity to exercise in profes- 
sionally designed and built facilities, utilizing the finest equipment available 
and with a professional staff available at all times to assist them. Without 
these centers, these millions of Americans would not have the opportunity lo 
conduct year round uninterrupted programs of personal fitness. 

At the moment, our industry has one primary concern with respect to the 
programs of the forthcoming Congress and the White House Conference. This 
concern is the regulatory effects of the Federal Trade Commission which, we 
have observed, are predominantly aimed at Small Business. A quick glance at 
the list of current rule-making procedures under way by the Federal Trade 
Commission makes it obvious that the full impact of these "Rules" are directed, 
and are having their fullest impact, on small businessmen who, as we all know, 
are beset by many other problems in our economy. Our industry is one of those 
industries which is undergoing a rule-making procedure. We are threatened by 
a rule that would have a most severe impact on the industry's ability to main- 
tain itself financially and to provide the services that it desires to provide to the 
consumers it serves. 

I should also like to add that the members of our Association desire that their 
operations meet the fullest needs of the American consumer. It is not our in- 
tention to unduly criticize the Federal Trade Commission for rules which would 
call for full disclosure so that the consumer may make intelligent purchase 
decisions. Nor would we object to rules which would establish general guide- 
lines of conduct or good business practices. We do. however, object to a rule, 
such as the rule now being suggested for our industry, which would destroy the 
industry's ability to contract with its members, cause lending institutions to 
withdraw financial assistance and create a circumstance whereby our small 
businessmen would be required to refund money to consumers while incurring 
expenses which would never be reimbursed. 



127 

I would therefore respect fully request that your committee, in its role through- 
out the 96th Congress, and the agenda of the White House Conference, Investi- 
gate the impact that the Federal Trade Commission, through its current rule- 
making procedures, is having and will have on the small business community 
in the United States. 

I particularly call your attention to the rule affecting our industry and ask 
that your committee consider investigating this rule before the rule is promul- 
gated and severe damage, possibly irreparable damage, is done to our industry. 

Once again, I thank you for this opportunity to comment. If I may be of 
further service to the committee as it goes about its difficult task, I urge you to 
contact me. 

Sincerely, 

Jimmy D. Johnson, Ph. D., 

Executive Director. 



A Paper on the Future Potentials for Small Business, Prepared by the 
Ceda Corporation for the Senate Select Committee on Small Business, 
Senator Gaylord Nelson, Chairman 

Our organization would like to offer the following legislative proposals for 
consideration. We feel that these proposals reflect the needs of small business in 
several key problem areas. 

SMALL BUSINESS REPRESENTATION 

Small business has demonstrated an inability to voice its opinions effectively 
on national legislation and policy. Objections are voiced after the adverse impact 
of legislation has been felt in the small business community. 

We must have adequate representation for small business interests from the 
first step of the legislative process. Therefore, we suggest : 

1. Creation of a small business advocate separate from the executive branch. 
This advocate must be capable of independent action in behalf of small business 
interests. This advocate should be accessible to all small business organizations, 
groups, and individuals. The advocate should be required to speak openly on all 
legislation and proposed policy decisions of potential impact on the small busi- 
ness community. 

2. We would also suggest the creation of small business subcommittees within 
the major committees of both Houses of Congress to consider the effects of pro- 
posed legislation on the small business community. 

3. We feel that impact statements should be required for every piece of legis- 
lation having a potential impact on the small business community. 

These proposals will facilitate more effective interaction between the Congress, 
the President, and the small business community. 

EDUCATION AND TRAINING 

1. Our organization interacts with small business owners on a daily basis. 
We encounter the whole spectrum of small business problems. We feel that the 
greatest of these is lack of management expertise. The 1976 Dun and Bradstreet 
survey of 9,628 business failures supports this conclusion. This survey revealed 
management incompetence to be the greatest underlying cause for these business 
failures in every business and category, manufacturers, wholesalers, retailers, 
construction and commercial sales. 

Small business owners need new education and training programs which are 
specific to small business problems. Many existing management training pro- 
grams are designed for the large corporation executive. Management programs 
sponsored by the Small Business Administration have reached only a small 
percentage of the businesses needing help. 

We need a broad scale national program to begin educating our prospective 
entrepreneurs at an early age. Our young people need to acquire an understand- 
ing of the nature and operation of businesses. 

This understanding is essential to the success of these prospective business 
people and even to the survival of our free enterprise system. A California survey 
conducted by the U.S. Chamber of Commerce revealed some alarming attitude's 
among our young people. These attitudes can be distilled simply as a lack of 
belief in the benefits of the free enterprise system coupled with the belief in the 
government as the ultimate providers. ( See attachment. ) 



128 

The proposed Education and Training Programs should provide a broad back- 
ground for prospective and existing entrepreneurs, increasing the skills neces- 
sary for successful small business operation, and including the basic skills of 
communication, special problems In business operation, advice concerning State 
and Federal regulations, preparation Of financial statements and loan applica- 
tion, recordkeeping, development of marketing techniques, information on bene- 
licial resources available within the community, motivation and self-concept 
training. 

.Motivation and self-concept training are the most significant aspects of the 
program. They should be included in all training programs. A proper attitude 
built around a positive self-concept is crucial to individual growth and business 
success. A positive self-concept is the beginning of motivation. 

These two essential elements, positive self-concept and motivation, can be 
instilled even in debilitated people through structured positive experiences. 

We are convinced that there must be a national policy supporting education 
and training programs for small business people. 

2. We suggest that these programs be promoted through a finance program 
keying lower interest rates on government loans and financing to appropriate 
levels of business management training. This will help sell the program through 
a demonstration of profitability. 

TAX BELIEF 

The economic position of the American business community and especially the 
small business community is gradually eroding. Louis F. Laun, a top administra- 
tor at the Small Business Administration, states that the ratio of debt to assets 
has shown a steady increase. This trend must be reversed if our small business 
community is to survive. 

1. We recommend Tax relief for small business owners to free more profits 
for reinvestment in the business. This could be accomplished through a modifica- 
tion of the Keough Plan. 

2. We would also recommend tax incentives to encourage small business devel- 
opment and to discourage merger with larger firms. Small business tax breaks 
can make ownership more profitable. 

INTERNATIONAL TRADE 

Small businesses are not realizing their full potential in the export trade. Ac- 
cording to the Department of Commerce, only 2 percent of a possible 20 percent 
of small businesses having an export capability are actually engaged in exporting. 

International trade intimidates many small business people. This reticence 
stems in major part from ignorance. 

1. We propose a National Mass Media campaign to sell the concept of inter- 
national trade to small business people. New programs such as WITS must be 
publicized. 

2. We also propose the development of a network of International Trade Cen- 
ters concentrated in areas of heavy commerce. These centers would disseminate 
information on International Trade opportunities for small business. They 
would provide information on how to take advantage of these opportunities. They 
would conduct workshops to involve local small businesses in international trade. 
They would tie in with Worldwide Information and Trade Systems (WITS) 
computer data terminals. 

We are convinced that International Trade must be accepted by small business. 
To foster this acceptance, we need a national campaign to publicize the opportu- 
nities that are available and to put these ideas into the local communities through 
regional International Trade Centers. 

TECHNOLOGY AND SCIENCE 

Small business has difficulty finding and utilizing new technology. Small tech- 
nology oriented firms often find it difficult to sell their technology. Technology 
transfer is crucial to our prograss and development and to the marketability of 
our products. 

We must remove barriers to the free transfer of technology between the gov- 
ernment and the small business community if small business is to enter effectively 
into the world trade market. 

1. We suggest a creative financing program to encourage the development of 
technology oriented firms. 



129 

2. We must encourage technology brokerage to facilitate technology transfer 
into the world trade market. 

3. We must ensure that small businesses participate in the development, indus- 
trialization and commercialization of outer space. 

4. We must ensure small business participation in the development of inner 
space (the worlds oceans with their vast resources). 

We are convinced that these programs will encourage the utilization of the 
entrepreneurial spirit of the small business person. This spirit has been respon- 
sible for the majority of innovative technology over the past 20 years. We must 
take our ideas from the drawing boards and put them into the businesses and 
market places of the world. 

RESEARCH 

Our organization 1ms had occasion to use the Bureau of Census Publication, 
"County Business Patterns." We feel that incorporation of sates/ receipts into 
this publication would be of great assistance to us who wish to construct a pro- 
file of Small Business at the community and State level. Such an addition 
included in Table 1A or Table IB would provide a broader picture of small busi- 
ness trends in our area. 

We hope that these proposals have been of help in pinpointing some of the 
problems and possible solutions for small business . 

We will be happy to discuss in further detail any of the recommendations 
specified above at your convenience. 

Leonard A. Bi.ackshear. 
Executive Director, The Veda Corporation. 

Attachment 

Published in January 1978 newsletter of "Women in ABC" 

AX EYE-OPENER FROM CALIFORNIA 

Senator Schrade (R) California, recently called our attention to the results of 
a survey conducted among high school students by the U.S. Chamber of Com- 
merce through the Opinion Research Institution of Princeton University. The 
Senator commented that if these figures are any criterion "both business man- 
agement and the public schools have done a poor job of convincing young people 
of the virtues of the American Free Enterprise System." 

It's hard to believe, but based on their answers to 12 questions related to the 
Free Enterprise System, here's what the young people thought : 

1. 07 percent of students polled do not believe in the need for profit. 

2. 82 percent clo not think we have competition in American business. 

3. 02 percent think the government has the responsibility to provide jobs. 

4. 63 percent were in favor of government ownership of banks, railroads, and 
steel companies. 

."». 56 percent of the girls and 30 percent of the boys had "no opinion" when 
asked whether or not government should take over industry. 

6. 9 percent polled said that capitalism had no advantage over communism. 

7. 40 percent could not even name any advantage that capitalism may have 
over communism. 

8. 53 percent wanted close government regulation of all business. 
!>. 01 percent thought a worker should not produce all he can. 

10. 01 percent rejected the profit incentive as necessary to the survival of a free 
enterprise system. 

11. 50 percent thought that the federal government contributed most to national 
prosperity. 

12. 55 percent think that the best way to improve our standard of living is not 
by workers producing more, but by giving workers more wages. 



Ch \r\iA\. Duff and Pail. 
Washington, i>.<\. November /7. I 
Herbert L. Spira. 

Chief Counsel, Senate Select Small Business Committee, XJ.8. Senate. Wash- 
ington, D.C. 
Dear Herb: We were very appreciative for the opportunity to discuss at yes- 
terday's hearing some of the issues concerning the small high technology labora- 



130 

tories in the United States. I am enclosing corrected copies of the summary 
which we left with you. 

I will look forward to discussing ways in which we can work with the 
Committee in coming mom lis on issues which you believe deserve the Commit- 
tee's consideration. 
Sincerely, 

James S. Hostetlkb, 
Enclosures. 

Amkkhan Council of Indepenpent Laboratories, Inc. 

~\Yashington, !).('., November 15, 191S. 

/. Reform of tax laws governing commercial activities of organizations providing 
laboratory and professional Services 

Despite the consideration in recent years by Congress of a variety of tax 
proposals affecting small businesses, one major deficiency in existing law has 
received no serious consideration; That is, the tax-favored treatment non- 
taxpaying (nonprofit or not-for-profit) organizations receive under existing tax 
laws and regulations in engaging in commercial activities in direct competition 
with taxpaying organizations. Congressional investigation and review of this 
fundamental inequity is overdue as has been compellingly outlined in a recent 
Special Report entitled "For Many, There Are Big Profits, In 'Nonprofits' " which 
appeared in the November 6 issue of U.S. News and World Report. A copy of 
this article is attached (Attachment A). 

Also provided for the consideration of this Committee are two additional 
documents: (1) A summary memorandum dated October 2, 1978, analyzing the 
problem of tax-favored competition and making preliminary recommendations 
to deal with the problem (Attachment B) and (2) A paper on "The Role of 
Non-Profits" which expands on this theme (Attachment C). 

The devastatingly negative impact the present laws have on small laboratory 
and professional services firms and the negative impact this phenomenon has on 
collection of tax revenues and the proper Federal tax treatment on income from 
commercial activity require immediate attention. 

A.CIL is prepared to share with the Senate Committee more detailed informa- 
tion about specific aspects of this basic inequity in the present tax laws. 

2. Proper implementation of the Federal Grant and Cooperative Agreement Act 

of 1911 

Traditionally, only public agencies and nonprofit organizations have been eli- 
gible to receive Federal grants. Frequently, a grant award has been made to a 
profit organization to acquire a service, rather than providing that any qualified 
nonprofit organization to acquire a service, rather than providing that any quali- 
fied organization — nonprofit or taxpaying — compete for a procurement. The re- 
cently enacted Federal Grant and Cooperative Agreement Act of 1077 theoretically 
provides a statutory basis to limit this problem, but the fact is that during the 
period when planning and study leading to implementation is occurring, more, 
not less, funds are being awarded on a non-competitive basis by means of grants. 

The adverse implications of this method of dispensing Federal funds for small 
businesses requires this Committee's scrutiny and appropriate measures need to 
be developed to assure that small businesses can fairly compete for Federal funds. 

3. Increased use of small technology based firms in Federal Research and 

Development 
In a report dated March 10, 1977, the Office of Management and Budget in- 
formed the President that "small firms have compiled a striking record of 
innovation''. This report concluded that "small firms are inadequately used" in 
the Federal government's acquisition of $2(> billion worth of research and 
development, and that "our country will lose significant high technology capabil- 
ities (in the absence of) a concerted effort to increase small business R&D 
awards . . ." The report had ten specific recommendations for accomplishing this 
goal. Over one year has passed and these recommendations have not been im- 
plemented to our knowledge. Another Presidential study is underway which will 
not he completed before next spring. No further study is required. We need 
action now. 

.'/. Small business development centers 

The Small Business Administration and the Congress have initiated legis- 
lation to establish a number of Small Business Development Centers (SBDCs I at 
universities around the country to provide management and technical serv- 



131 

ices ro small businesses requiring such assistance. We share the goal of strength- 
ening the prospects that new small businesses will succeed. However, we think 
that the success of the SBDC program would i..> enhanced if there were clear 
and unequivocal criteria and guidelines for the operation of these centers. In 
particular, AOL is convinced that the legislation should spell out the proper 
roles of the universities and the private sector in addressing the needs of 
small businesses. The universities' appropriate function is not to deliver serv- 
ices directly; rather they will serve best in the role of coordinators and 
catalysts, working cooperatively with small technical and professional serv- 
ices firms, among others, to provide needed help to other small businesses. ACIL 
is prepared to work on guidelines and criteria to define the proper roles of the 
interested parties in the SP.DC program. 

5. Conclusion 

We support many of the measures others have presented to the Committee 
for consideration. In this brief presentation, ACIL has endeavored to suggest 
issues of special concern to small scientific laboratories throughout the United 
States. 

Attachments. 

Attachment A 

For Many. There Are Big Profits in "Nonprofits" 

Tempers are rising over growing numbers of organizations that seem to be 
feasting on tax exemptions, generous donations and cutrate postage. It's a 
pattern that is prodding Congress, officials into action. 

The word "nonprofit" strikes a sympathetic chord in the hearts of many 
people. It conjures up images of charities and service groups that operate on 
shoestrings, struggling along with volunteer staff members and bare-bones 
offices. 

That type of situation does exist in many of the more than 800,000 organiza- 
tions that now enjoy tax-exempt status as nonprofit institutions. About 37 mil- 
lion Americans donate their services each year to charities and other volun- 
tary organizations that spend about 29 billion dollars annually, the bulk of 
ir tor worthwhile causes. 

But frequently these operations are something else again. Under the label 
"nonprofit" are organizations that are said to — 

Pay their executives fat salaries and allow them generous fringe benefits. 

Award contracts to their trustees and board members. 

Serve as fronts for commercial enterprises with which they have "sweetheart" 
den Is. 

Enjoy special mailing privileges and property-tax breaks that give them a 
competitive ed^e against taxpaying establishments. 

Engage in wasteful and sometimes fraudulent fund raising with little ac- 
countability to the public. 

Such questions about groups that enjoy special privileges are being asked at 
a time when taxpayers, catching the Proposition 13 fever, are looking under 
every rock for new sources of money to keep governments going. 

Says former Internal Revenue Commissioner Sheldon Cohen : "Nonprofits are 
a whole can of worms that Congress has yet to look at in a broad way. I've been 
blowing the trumpet for years to get lawmakers to spell out clearly what should 
be tax-exempt and what should not." 

HELPING HAND OR COMMERCIAL FRONT 

One of the most controversial court cases now pending in Washington, D.C., 
involves two of the nation's biggest nonprofit organizations : the American 
elation of Retired Persons (AARP) and the National Retired Teachers Associa- 
tion (NRTA). The two groups are accused of serving as covers for a large com- 
mercial insurance company. 

In a 27-page complaint. Harriet Miller, former executive director of the 
AARP, charges that the two associations have been used as vehicles to shunt 
business to the Colonial Penn Group of Philadelphia, a company that sells insur- 
ance as well as travel packages, employment assistance and other services. 
Leonard Davis, named in the suit, is a director and principal stockholder of 
Colonial Penn and was one of the founders of both the AARP and the NRTA, 

According to the complaint: ". . . Leonard Davis has become a multimillion- 
aire from the sale of insurance and other services to elderly people who are sys- 



132 

tematically misled into believing that the primary purpose of the associations Is 

the hest interest of the elderly. The fact is that AARP was designed and created 
to be. and NKTA was turned into, a group for insurance purposes." 

Colonial Penn is one of the nation's most profitable insurance firms, in the five- 
year period ending last December 31, the company's after-tax return on invested 
capital averaged 30.5 percent, placing it in the top three companies with sales of 
250 million dollars or more. 

Victor Glasberg. an attorney with Hirschkop & Grad. the firm representing 
Miller, claims that no advertising for Colonial Perm's competitors appears in 
A A HP periodicals. 

The complaint alleges, too, that only Colonial Penn has access to the mailing 
listsof the two groups. The Postal Service also is Investigating whether the AARP 
and the NRTA improperly used rheir cut-rate mailing privilege 8 as nonprofit or- 
ganizations to send out promotions for the insurance firm. 

Attorneys for Davis refuse to comment on the case beyond denying the Miller 
charges point by point in documents sent to the U.S. District Court in Washing- 
ton. The AARP also has filed a countersuit, charging that Miller breached a con- 
sulting contract by suing Davis and others associated with the retiree groups. 

While the courts wrestle with this matter, experts in the tax-exempt field say 
there are many organizations around the country that are straining the definition 
of "nonprofit" to the limits. That's because the law permits many of these groups 
to operate commercial enterprises, often with little risk of losing tax-exempt 
status. Colleges, churches and charities can collect rent on offices and apartmenl 
buildings without paying taxes on that revenue as Ion? as they own those 
properties outright. Since 1969, nonprofit organizations have been obliged to pay 
taxes on income from "unrelated businesses," such as restaurants or factories. 
However, there are exceptions to that rule, and opinions among local IRS exam- 
iners vary as to what constitutes an unrelated business. 

The 1969 law, for example, contained a provision that lawyers call "the Loyola 
bailout," which provides that revenues from New Orleans radio and television 
stations operated by Jesuit-run Loyola University would not be taxable as unre- 
lated business income. Instrumental in securing that provision were two power- 
ful-Louisiana lawmakers, Senator Russell Long and the late Representative 
Hale Boggs. 

Loyola's WWL, a television affiliate, is the Xo. 1 station in the New Orleans 
market, according to the Rev. Frank Benedetto, a spokesman for the station. 
"Ninety percent of our profits go to the university instead of ."0 percent to Uncle 
Sam." he says, adding that the proceeds from the station are the main endow- 
ment of the school and provide scholarships to many students. 

But others around New Orleans view the matter differently. Says one in<! 
observer: "It's a difficult, competitive situation. They have more readily available 
money to invest in their product — programing — and in equipment. They're well 
managed, but they play by different rules." 

Playing by different rules, too. are the many colleges and universities around 
the country that operate motels and restaurants and maintain stores that sell 
refrigerators, motorcycles and other items not related to education. Not only do 
these establishments sometimes take business away from local merchants but the 
revenues are often tax-exempt, depending on the rulings of IRS examiners. 

Explains Joseph Tedesco, director of the Exempt Organization Division of the 
IRS : "It's up to us to determine whether a school can sell a sweat shirt and not a 
Honda, and we must take responsibility for the decision and answer the com- 
plaints from competing stores." 

More than 140.000 nonprofit fraternal organizations also operate insurance 
arms, health programs and other services, which are tax-free as loner as salo< are 
directed exclusively to the groups' members. These services often are in competi- 
tion with tax-paying commercial firms. The Knights of Columbus life-insurance 
nrogram. for example, has about 4 billion dollars' worth of insurance business. 
Lutheran Brotherhood has about 7.7 billion dollars' worth. 

MAKING TAX AXD POSTAGE BREAKS PAY OFF 

Many for-profit companies, feeling the pinch from zooming postal rate< and 
higher taxes, are taking aim at the special privileirps given to nonprofits. 

Congress now provides the Postal Service with TOO million dollars of taxpayers' 
money annually to make up for nonprofit organizations' lower postal rates. 
Leaders of nonprofit groups argue that this subsidy is a small price to pay for 
the services they give the public, services that government might otherwise have 
to provide. 



133 

Critics, however, see it another way. Says Charles S. Mill, the president of 
American Business Tress: -it is my observation that many nonprofit mailers do 

not involve themselves solely in charitable Or educational work, but instead 
are engaged diligently in proprietary activities such as mass circulation publish- 
ing, soliciting advertising of all kinds, and selling services such as [nsuran e 

policies to their members. Tn many cases, these proprietary activities consist of 
unfair competition with tax-paying competitors." 

Mill points out that nonprofit organizations that mail subscription or member- 
ship solicitations at third-class rates pay only 2.7 cents per letter, compared with 

S.4 cents paid by commercial publishers for similar letters. Others add that non- 
profit publishers pay no taxes on revenues from subscriptions and are allowed 
more-generous tax deductions on revenues from ads that appear in their publica- 
tions. Many pay no taxes at. all on advertising revenues. 

Some nonprofit publications have taken out full-page ads in major newspapers 
to show advertisers how their circulations have grown in comparison with other 
magazines' — never bothering to acknowledge the special breaks they enjoy. Says 
Garth Hite, publisher of Atlantic Monthly: "I could double my circulation, too. 
if T had the advantage of the cheap third-class mailing rates paid by nonprofits. 

Thomas Black, advertising sales director for Smithsonian Magazine, a non- 
profit publication, plays down these advantages, saying that it is the quality of a 
publication, not mailing breaks, that wins subscribers. Even so, there are signs 
that the IRS is getting tougher on nonprofit publishers. It has told the publishers 
of several scientific journals that it plans to revoke their tax-exempt status. One 
of the major losers would be the American Chemical Society, which publishes 
18 journals with a combined circulation of 300,000. The IRS questions the society's 
practice of selling subscriptions at a higher rate to nonmembers on the ground 
that it. violates a tax law prohibiting individuals from reaping benefits from net 
earnings. 

The society is contesting the IRS action. The group is also trying to reverse 
the tax policy that requires it to pay taxes on ads in its publications. Secretary- 
Rod Ilader explains that only ads of a scientific nature are accepted and that 
the income from them should therefore not be considered unrelated to the pur- 
poses of the group. 

The organization has come under criticism from for-profit publishers in the 
scientific field who argue that the gathering of information for its lucrative 
Chemical Abstracts has been enhanced because of millions of dollars in govern- 
ment research grants awarded to the society. 

Also studying nonprofit groups is the U.S. Postal Service, which has grown 
sensitive to increasing complaints about the cheaper rates given to these organiza- 
tions. The service is beginning a new system to spot changes in the IRS's list of 
tax-exempt organizations so that special mailing privileges can be revoked as 
quickly as possible. 

'•There is a lot of whistle blowing by ordinary citizens," says Theodore Troy. 
director of the Office of Mail Classification. "When people see 2.4 cents stamped 
on a letter — and they're paying 15 cents — they wonder why." 

THE DEBATE OVER PROPERTY TAXES 

People are concerned, too. about exemptions on property taxes given to non- 
profit groups, a practice that critics say has put a more of a burden on homeowners 
and businesses-. 

. An example of how such exemptions can get out of hand is found in the tiny 
community of Hardenburg, X.Y.. situated in the Catskills. There. 213 homeowners, 
facing soaring tax bills as a result of exemptions given to big landowners hud 
their homes declared churches- to get them off the fax rolls. The residents became 
ministers of the Universal Life Church, a California-based organization that 
mails out divinity degrees for a $20 offering. 

Robert Kerwick. the community's tax :isse<sor. says he does not blame the 
residents and has no intention of forcing them to pay unless the courts or the 
state rule that the Universal Life Church is not a bona fide religious group. "I 
saw people join this church who were about to lose their homes bo-ause of taxes." 
says Kerwick. who insists that the only solution is for New York and oth^r states 
to' impose stricter limits on the amount of property owned by nonprofit groups 
that '-an be exempt from property taxes. 

Kerwick points to several examples in his area of larire tax-exempt holdings 
by nonprofit organizations. An S.OOO-acre farm owned by the Jehovah's Witnesses 
is able to sell food it raises to state institutions at lower prices than ordinary 



134 

farmers charge because of the tax break, says Berwick. Also nearby are tax- 
exempt sites of 1,300 acres owned by 13 Zen Buddhist monks and 1,776 acres 

owned by the Nassau County Council of Boy Scouts. Then, too. there is a local 
group Of well-to-do residents who donated 3,900 acres of property to a tax-exempt 

conservation group. Not only did they enjoy a healthy tax write-off for their 
donation, hut they swung a deal to retain timber, water and farming rights to 
the land. 

Says Kerwick : "If everyone else can get economic benefits by playing around 
with exemptions, the townspeple believe they can, too. But their real purpose is 
to create a crisis that will force action in the Legislature." 

The situation in Hardenburg is an extreme example; yet other communities 
find it tough to ferret out tax dodgers hiding behind the nonprofit label. Says 
Robert Gustafson of the California State Board of Equalization: "When is a 
commune a religious commune V It's up to the Legislature to plug that hole." 

The equalization board lias denied some applications for exemptions from 
religious groups, but bas usually losT in courts. As a result. Gustafson says, many 
grops are amassing large holdings under religious exemptions. The Sino-American 
Buddhist Association bought the Mendocino State Hospital in I'kiah, Calif., and 
turned it into a spiritual center. Nyinga Institute, another religious group, owns 
020 acres of Sonoma County. That's just a small sampling. 

Some communities are urging nonprofit organizations to pay something for serv- 
ices they receive. In Boston, where almost 50 percent of the real estate is tax- 
exempt, universities are now required to pay the city a percentage of the revenue 
obtained through the renting of sports arenas and other facilities. Wesleyan 
University pays Middletown, Conn., for water, sewerage and salutation services. 
And Cornell University makes an annual payment to Ithaca, N.Y., for police and 
tire protection. Most of the time, however, pleas by city officials are largely 
ignored. 

THE PUBLIC'S RIGHT TO KNOW 

The extent to which nonprofit organizations take unfair advantage of their 
privileged status is not easy to pinpoint, says a tax specialist in Congress, "be- 
cause it's so hard to get information out of them." Church-related groups are not 
required to publish details on their finances. Other nonprofits file annual infor- 
mation returns with the IRS. These returns are public information, but it often 
takes weeks for the IRS to respond to a request to view them. 

Congress in 1969 took strong steps to stop conflicts of interest in foundations 
but did not require public disclosure of their operations. The result, says James 
Abernathy of the National Committee on Responsive Philanthropy, is that fewer 
than 500 of the 26,000 private foundations publish annual reports. 

One consequence: Many abuses go undetected. A report issued last year by the 
Twentieth Century Fund, a New York research group, stated that -hoards of trus- 
tees that rigorously maintain arm's-length relationships and pursue the best 
interests of the endowment fund above all tend to be more the exception than the 
rule." 

Chris Welles, who prepared the report, points out that a number of founda- 
tions hold the majority of their assets in shares of their major donors' firms. An- 
other tendency is to use the services of banks, controlled by foundation trustees. 
The 1969 legislation ordered stiff fines for foundation officials engaging in 
"self -dealing," that is. benefiting personally from business transactions with their 
foundations.' The IRS since then has audited about 25,000 foundations. States 
have also stepped up their surveillance. 

That, law, however, did not prohibit conflict-of-interest situations in other kinds 
of nonprofit groups. For example, the Cousteau Society, a New York conservation 
••roup founded bv Jacques Cousteau, the underwater explorer, has an officer and 
a board member' who both belong to the law firm that handles the society's legal 
work In the past the society has also paid a firm owned by a board member to 
handie fund solicitations and has purchased services from for-profit operations 
controlled bv Cousteau. These practices, while frowned on by the Better Business 
Bureau and other charity watchdogs, are legal under current law. Ihe society 
last year raised about 3.2 million dollars. . ^ 

In Texas, Samuel Harwell, a former investment analyst with the Umversitj Of 
Houston, was sentenced on October 23 to four years in prison on federal mail- 
fraud charges. He also was named as "co-schemer" in an arrangement in which he 
allegedly shunted university investment business to Covington-Knox a brokerage 
firm owned in part bv bis former business partner Roger Knox. Ihe firm is ac- 
cused by the Texas attorney general of selling securities to the university at 



135 

Sri^S ier f ! inn 2? arket y ' Ahu ' :md ,m - vin - securities from the institution at 
5 .,\.<,' ' ' a ' ll< *' n " x and Aub rey Covington, the firm's principals, denied the 

i.rvi.xc HIGH o.n tiii: HOG 

l sualiy escaping notice, to... are the salaries and expenses paid by foundations 
ana other nonprofit organizations. The directors of many large charitable trusts. 
sucn as the lord Foundation, make more than $100,000 ,-, year, not counting gen- 
erous travel allowances and other fringe benefits. 

Many organizations also maintain Bprawling offices and targe staffs to disburse 
moneys. Not Ion- ago, one newspaper reporter, asked to attend a Ford Foundation 
session on crime, recalled how awed be was at the sumptuous 12-story headquar- 
ters and at being wined and dined during his stay. 

The Ford Foundation last year approved Pi' 'million dollars in grants, and <.hi- 
cials there contend that the responsibilities involved in disbursing that kind of 
money justify the paying of ;■ good salary to the group's president. Still, Chris 
Welles, author of the Twentieth Century study, contends that, nonprofits can 
spend more freely than commercial firms do. "High salaries and offices with sub- 
stantial trappings are fairly common in nonprofit organizations, If vou don't have 
to report to shareholders, there's much Less pressure to keep costs down." he says 

A case in point is John McCahe. who earns $121,000 a year as president of 
Blue Cross and Blue Shield of Michigan, a nonprofit organization. In addition, he 
is given the use of a Ford Thunderbird and other expensive fringe benefits. For 
example, the company paid his S900 initiation fee to the Detroit Athletic Club, as 
well as a §7.500 initiation fee to the Oakland Hills Golf and Country Cluh. 

A board member critical of this compensation says: "These are' symbols, and 
they are not symbols of an organization trying to hold down health-care costs." 

However, McCabe maintains that he belongs to the clubs for business pur- 
poses and because executives of other firms do. ''We're following rather than 
leading," he says. 

McCabe's salary comes from an organization that took in 1.8 billion dollars 
in premiums last year, and one consulting group hired by Michigan Blue 
suggested that he was underpaid. However, much smaller nonprofit groups, in- 
cluding charities, pay their officers quite well. The Arthritis Foundation, which 
received about 4 million dollars in contributions in 1976, pays its chief officer 
about SG0.OOO a year. The Disabled American Veterans, which collected more 
than 20 million dollars in contributions in 1977. had five officers who made more 
than $49,000— the top man earned nearly $03,000. 

Much more lavish examples have been uncovered in recent years. M. C. Van 
de Workeen, executive director of the National Information Bureau, which 
monitors charities, says one group that operated internationally took its 
board members on world tours three times a year. Another Midwest-based 
charity built a home complete with stables for the use of its executive director 
and also provided him with a yacht in Florida. 

An official with New York's Office of Charities Registration, which regulates 
fund raising in the state, says far too little attention has been given to salaries 
and administrative expenses of nonprofit organizations. One problem is that, 
in financial reports, these expenses are often included as part of program spend- 
ing rather than broken out separately, -ruder this set up. spending for lavish 
offices and big salaries makes an organization look better." he explains, '-because 
it boosts the amount of money listed for programs." 

PROPOSED : TIGHTER CONTROLS 

Public charities— the religious, health and educational organizations that 
solicit funds from the public— are among the chief targets of those who want 
to bring reform to nonprofits. At stake is much of the 36 billion dollars raised 
for philanthropy each year. 

Still unregulated by many states are the fund-raising practices of these non- 
profits, and examples' of excessive spending and other abuses are rampant. 

In Georgia, for example. Tim Ryles. head of that state's Consumer Agency, 
says there is "no documentation" that money raised by the Georgia Police 
Benevolent Association eroes to widows, orphans and other needy people cited 
bv telephone solicitors contracted by the PBA. He claims that as much as 80 
percent of the money went to solicitation contractors and that the rest was 
"to pav for funds for insurance premiums for polio- »»"..i».>rs. for collective 
bargaining and for litigation." 



136 

Atlanta homicide detective Sidney Dorse?, president of the Georgia PBA 

"hiwi.olf , Vn^ 1 ; ;' 1 ; T er en < l0 . rsed *** °* the statements about widows m 
children, but that telephone solicitors deviated from previously agreed-on scriDts 

In Honda, abuses by police associations have prompted a new law that limits 
professoinal solicitors to 25 percent of revenues collected, instead of the 40 
!<• 80 percent now common. 

Also under fire for alleged fund-raisin- abuses is the Congress of Racial 
Equality, which has been investigated by statt>s such as North Carolina Massa- 
chusetts, Alaska and New Jersey. Mary Joann Reedy, the attorney who 'handled 
the case tor the Massachusetts attorney general, explains that telephone solici- 
tors working for CORE misrepresented the group as a federal agencv connected 
with the Equal Employment Opportunity Commission. She notes, too that CORE 
was billing businesses for ads in its magazine that the firms never authorized 
Prospective donors also claim to have been harassed by CORE fund-raisers. In 
June. CORE agreed, without admitting guilt, to a consent decree in the Massa- 
chusetts case, promising not to engage in misleading fund-raising practices. 

The attorney general of California in a recently settled suit ordered the 
executive director of the Animal Protection Institute to resign from the board 
of that group and to account for $17,000 in unauthorized spending. The state 
alleged that the API, based in San Francisco, misused more than $100,000 in 
donations and spent more than 90 percent of its income for administration, 
salaries and fund raising. The executive director, for example, is paid $4,000 a 
month. 

Consenting to a judgment by the New York State Supreme Court in July was 
the Richard Viguerie Company, a professional fund-raising outfit based in Falls 
Church, Va. The firm agreed to limit its fees to 35 percent of the funds it collects 
for New York charities. The state attorney general had charged the firm with 
retaining as much as 75 percent of moneys raised for various charities. Among 
the company's clients were the Children's Relief Fund of the Korean Cultural 
and Freedom Foundation. 

Fund-raising literature for that charity included such statements as the 
following: "As I write you this letter, thousands of little boys and girls are suf- 
fering from the terminal forms of malnutrition." In this case, less than 6.3 
percent of 1.5 million dollars collected went to the children, according to the 
attorney general, while more than $920,000 went to the Viguerie firm. Most ex- 
perts say that well-established charities should spend no more than 25 percent 
of the donations they receive on fund raising. 

Abuse of program funds also is cropping up in various nonprofit poverty agencies 
around the country. The Puerto Rican Community Development Project was 
taken over this year by New York City's Community Development Agency. 
That action followed an audit of the project's books that showed what invent i- 
gators described as "millions of dollars" of waste through "chronic mismanage- 
ment. "' The city also canceled a 1.2-million-dollar contract with another poverty 
group, the Hunts Point Community Corporation, after finding evidence of pos- 
sible fraud. Found in the agency's offices were pads of blank bills from private 
companies, such as supply stores, which could be used as vouchers to account 
for the spending of poverty funds. 

ahead: closes SCRUTINY OF NONPROFITS? 

There are signs of a new campaign to stamp out such abuses and to clip the 
wings of some nonprofit s. 

Representative Charles Wilson (D-Calif. ) has introduced a bill that would 
require charities to make public the percentages of their contributions thai go 
to the causes they represent. 

Also aimed at helping the public to understand better the finances of imu- 
profits IS a new audit guide soon to be introduced by the American Institute of 
Certified Public Accountants. These new standards will apply to Charities, foun- 
dations, museums and churches, which up until now have lacked uniform account- 
ing procedures. 

The !I*S is stepping up its review of nonprofits, particularly in the area of un- 
related business income. Congress in 1074 established a separate IRS office to 
monitor tax-exempt organizations. Funds and manpower for that operation are 
increasing. A major examination of the 1.500 largest tax-exempt organizations 
is just being completed, and nonprofits are already feeling the beat. 

Says Rod Ilader of the American Chemical Society: "The IRS is looking for 
anything it can attack in large nonprofit organizations in order to collect more 
revenue.'' 



137 

Former IRS Commissioner Cohen argues that what is really Deeded Is a broad 
review by Congress of nonprofit institutions. "So far, actions taken have followed a 
Band-Aid approach," he explains. "Congress simply enacts statutes as a response 

to individual scandals." 

Meanwhile, there is no letup in the Hood of new organizations seeking tax- 
exempt status. That number has increased from 33. 556 in 1974 t.» 50,649 last year, 
a growth that alarms people who are skeptical about the benefits given to these 
groups. 

Says Robert Berwick, the harried tax assessor from Ilardenburg : "We just 
can't go on giving nonprofit status to every fly-by-night organization that comes 
down the pike. That has to stop, especially the way economic pressures are build- 
ing on people." 

Attachment B 

Octobeb 2, 1978. 

Tax-Favored Competition: Ax Analysis of the Problem and Recommended 
Actions to Deal With It 

This memorandum reviews ways in which non-taxpaying (nonprofit) organi- 
zations are favored under the present tax laws and regulations in competing with 
taxpaying (for-profit) firms providng identical or similar services and makes 
recommendations fo eliminate such unfair competition. 

PRESENT TAX LAW'S AND REGULATIONS 

Section 501(c)(3) of the Internal Revenue Code of 1954 provides, in part, 
for exemption from Federal income tax for a corporation organized and operated 
exclusively for scientific research and testing for public safety purposes. 

Section 511 of the Code imposes a tax on the unrelated business income of 
organizations described in section 501(c) (3). Section 513 of the Code defines the 
term "unrelated trade or business" as any trade or business the conduct of 
which is not substantially related to the exercise or performance by an organiza- 
tion of its exempt function. Under section 512(b) (7), (S) and (9), there is 
excluded from unrelated business taxable income, all income derived from re- 
search for Federal or state governments ; in the case of a college, university 
or hospital, all income derived from research performed for any party, and ail 
income derived from research performed by an organization operated primarily 
for the purpose of carrying on fundamental research., the results of which are 
freely available to the general public. 

ANALYSIS OF INEQUITIES UNDER EXISTING LAW 

The private professional services industry consists of thousands of firms en- 
gaged in research and development, testing, design, planning, data processing, 
information services and consulting work of clients in both the private and 
public sectors. Over 90 percent of such firms are small businesses. Several kinds of 
non-taxpaying organizations are in direct competition with taxpaying prof* a- 
sional services firms. 

First, "captive" nonprofit research institutes known as Federally Funded Re- 
search and Development Centers (FFRDCs) or Federal Contract Research Cen- 
ters (FCRCs) provide professional services. The FFRDCs or FCRCs normally 
work principally for a particular Federal department or agency and receive a 
substantial portion of their funding pursuant to a long-term, open-ended master 
contract with the sponsor department or agency. These captive nonprofits also 
provide services for other Federal departments and agencies, state and local gov- 
ernments, commercial and industrial clients. In 1973. there were 59 nonprofit cap- 
tive FFRDCs and FCRCs, including RAND Corporation, Mitre Corporation and 
others. 

A second category of nonprofit research institutes are the "non-captive" non- 
profits such as Southwest Research Institute, Franklin Institute. Battelle Me- 
morial Institute, Stanford Research Institute and others. While these organiza- 
tions' sources of funding are more diverse, at least 66 percent of their income re- 
sults from the performance of professional services for various Federal, 
and local governmental agencies. 

A third group of nonprofit organizations engaged in providing professional serv- 
ices is the universities and colleges. Approximately eleven percent of the Federal 
research and development budget for fiscal year 1!»77 ( $28.6 billion) was allocated 
to research and development performed at universities. Of this amount, 89 percent 



13S 

was "applied" and "development" activity, directly competitive with similar serv- 
ices available from the professional services. Universities and colleges are pro- 
viding professional services to commercial and industrial clients as well. 

Private professional services firms, nonprofit research institutes and univer- 
sities, when engaged in the same enterprise activity of providing professional 
services are treated differently under the present tax laws. Examples of thifi 
of uniformity and equity include : 

1. The blanket exclusion from the unrelated business income tax of applied 
research work performed for governmental agencies or in the case of uni- 
versities for anyone ; 

2. The inadequate guidelines defining when scientific research work per- 
formed for a private sponsor is not carried on in the public interest and is 
therefore subject to taxation ; and 

3. The imprecise distinctions as to when activities are of a type ordinarily 
carried on as an incident to commercial or industrial operations and are 
therefore subject to taxation even if performed for the government. 

These and other deficiencies in the existing tax law. regulations and enforce- 
ment policies result in large amounts of income received by nonprofit organiza- 
tions from professional services not being subject to taxation. 

An examination of the legislative history of section 301(a) of the Revenue Act 
of 1950 (64 Stat. 947) which first established the "unrelated business income" 
provisions of the Internal Revenue Code illustrates the fact that these provisions 
are no longer adequate. Section 301 was intended to deal with "unfair competi- 
tion" by tax-exempt organizations engaged in commercial activities. The excep- 
tions for research work were not based on a judgment by the Congress that this 
policy against unfair competition should not be extended to this particular 
market. Rather. Congress appeared to conclude that since few profitmaking or- 
ganizations were regularly performing contract research for the government at 
that time, there was no competition in research services, fair or unfair, which 
needed to be addressed. 

By 1978, the characteristics of the marketplace have drastically changed with 
taxpaying firms competing directly with non-taxpaying entities for government- 
sponsored research contracts. Whatever rationale existed in 19o0 for the statutory 
exceptions in the unrelated business income tax, no longer applies. 

These gaps in present law hurt both the government and the taxpaying profes- 
sional services sector. While the non-taxpaying sector could argue that the gov- 
ernment acquires research assistance at a reduced cost, the facts do not support 
this allegation. 

First, almost all contracts for research and development and for other pro- 
fessional services are cost reimbursement type contracts. The exemption provided 
by these two sections does not reduce the costs incurred by the tax-exempt 
performer, and the government in turn does not realize any cost savings. Second, 
available evidence indicates that when tax-exempt performers seek or accept 
"fees'' under such contracts these fees are not reduced to reflect fairly the impact 
of the tax exemption. The tax-exempt organization is likely, for the most part, to 
choose to maintain competitive price levels and thus to retain a large margin of 
extra profitability. It is this "surplus"' resulting from the tax exemption which 
constitutes the fundamental competitive advantage accruing to the tax-exempt 
nonprofit firm. It constitutes, in effect, a subsidy from the Federal government 
to these organizations, to be utilized as their governing officials determine. These 
revenues can be used for investment in improved physical plant and capital 
facilities, or for offering high salaries and fringe benefits to attract personnel. 
If the performing unit is a subsidiary of a larger charitable enterprise, part 
of these revenues may also be siphoned off to support those charitable activities. 

In addition, the tax-exempt organization remains free to engage in unfair 
price competition in those circumstances where it perceives that such behavior 
may result in a particularly desirable contract. In short, as a result of this hidden 
Federal subsidy, the exempt organization enjoys considerably greater flexibility 
in the business environment in which both must operate. 

RECOMMENDATIONS 

Unfair competition from non-taxpaying organizations affects a broad range 
of private sector organizations and firms at present. A number of major national 
associations are deeply concerned about the adverse impact of present tax laws, 
regulations, rulings and policies on private professional services. 

As a consequence, it is recommended that immediate consideration is warranted 
of how present laws and regulations could be modified to assure equitable tax 



139 

treatment of all organisations engaged In providing similar services. Such meas- 
ures might Include: 

1. Elimination from preseftl law of the broad exemptions contained In 
section 512(h) (7) and (8); and 

2. Stricter enforcement of the 501(c)(3) exemption and limiting the 
extent to which such an organization can engage In unrelated bush 
without losing its exemption. 

atta( ii mk nt c 

The Role of Nonprofits 

(By John F. Magnottl, Jr. and James 8. Ilostetler) 
/. An opportunity 
This conference is a welcome opportunity for a diverse group of individuals 

to seek to define, understand and develop guidelines for different kinds of i 
nidations when they engage in enterprise activity— in this case, the provision of 
professional services needed by the Federal government. 

_ The services being offered by the Manpower Demonstration Research Corpora- 
tion (MDRC) are professional services. There is confusion about what pro- 
fessional services are and where professional services capabilities reside. This 
confusion is reflected in the arbitrary and chaotic practices of government in 
determining when to "contract-out" for services. 

Private organizations, whether for-profit or nonprofit, share a common 
interest in assuring that government enterprise activity in professional services 
does not expand in ways that are detrimental to the public interest and the private 
sector. Private organizations, whether for-profit or nonprofit, share an uncom- 
monly common set of internal business and functional characteristics when en- 
gaged in enterprise activities. It is the external rules formulated and implemented 
by the government as they affect for-profit and nonprofit performers which are 
not common and which create inequities and distortions which are damaging 
to the public's interest in enhanced competition and the productive use of public 
resources. 

Until these larger questions relating to the proper roles of the Federal govern- 
ment, the nonprofit sector and the for-profit sector are effectively addressed, 
ad hoc arrangements with no overriding logic will continue to characterize the 
acquisition of professional services by the Federal government. In the hopes 
that with greater factual knowledge will come increased clarity in the relation- 
ships of these sectors, we make the following observations. 

II. Defining the professional services 

One of the few public efforts to define professional services occurred during 
the deliberations of the Commission on Government Procurement which pub- 
lished its final report in December of 1972. 1 In this report, professional services 
are defined as relating "to such fields as accounting, management, marketing, 
economics, and systems analysis: program evaluation: industrial engineering 
and operations research. The product furnished generally is a report which sets 
forth findings and recommendations for solutions to problems, suggestions for 
improving operations, evaluation of program results, suggestions for alternative 
means to achieve agency objectives, etc. . . . For some time, government agencies 
have engaged professional firms to perform such services in order to supplement 
in-hOTise capabilities. The types of firms engaged are companies, partnerships, 
or corporations — both profit and nonprofit". 2 (Emphasis added). 

We would suggest that the definition offered by the Commission on Government 
Procurement can be expanded to include firms engaged in research and develop- 
ment, testing, information and data processing, design, analysis, evaluation, edu- 
cation and training, and management consulting for clients in both the public 
and private sectors. These organizations are not usually engaged in the physical 
aspects of manufacturing. Most are small businesses. The professionals who work- 
in these firms usually are trained in one or more of the recognized academic 



1 Report of the Commission on Government Procurement (U.S. Government Printing: 
Office. Washington. P.O. 1972). 

2 Ibid, volume 1, p. 97. 



140 

disciplines, and academic degrees are an essential part of the professional 
services; 

It is clear that both profit and nonprofit organizations are viewed by the 
Commission on Governmenl Procurement as providing essentially the same serv- 
ices to government customers, and that, these services are considered l»y govern- 
ment managers to be professional services. 

The nature and scope of professional services is not nearly so clear to members 
ot* the current Administration. A series of attacks have been mounted recently 
against, a group disparagingly labeled by President Tarter, ex-Office of Manage- 
ment and Budget Director Lance and other Federal officials as "consultants". 
Confusion as to who and what "consultants" are is rampant. In the on-going 
debate about the use of consultants by the Federal government, many of the 
Federal participants either imply or state that the term "consultant" Includes 
professional services firms. A Presidential memorandum of May 12, 1977, states 
that, "There has been evidence that some consulting services, including experts 
and advisors are being used excessively, unnecessarily, and improperly". 3 This 
sweeping generalization is expanded further if necessary for the development 
of a good story. As an example, in the March 19, 1978 issue of the Washington 
Star, in an article entitled "Rail Improvers Laying Out .$30 Million for Con- 
sultants", the writer characterized consultants as "ranging from archaeologists 
and public relations firms to helicopter pilots and the National Urban Leaeue'V 

In OMB Bulletin No. 78-11, issued May 5, 1978. guidelines for the use of con- 
sulting services are established. "Consulting services" are defined as meaning 
"those services of a purely advisory nature relating to the governmental func- 
tions of agency administration and management and agency program manage- 
ment". Included as a specific example of such services are "policy and program 
analysis evaluation and advice". Such services are subject to specific limitations 
on use. Without exploring in depth the application of these guidelines, it should 
be emphasied that further definitional uncertainties and complexities have been 
introduced into the procurement of certain kinds of professional services. Assum- 
ing that this new inhibition on the use of outside sources of expertise does not 
apply, then it is necessary to note the confusion in the Federal government's 
policy of "contracting-out" for services. 

777. Contract in g-out 

Government policy requires the use of the private sector to provide necessary 
goods and services. This policy is published in OMB Circular A-76, "Policies for 
Acquiring Commercial or Industrial Products and Services for Government Use*. 
Currently undergoing extensive revision, the policy still states that "Federal 
agencies will not operate an activity to provide a product or service that is 
obtainable from a private source unless that activity has been justified in the 
national interest". 

Qualified nonprofits and for-profit firms share a common interest in the uni- 
form and fair implementation of this Federal policy of reliance on private 
enterprise. The nonprofits which traditionally have received substantial assist- 
ance by means of grants will find A-76 increasingly important as the require- 
ments of the Federal Grant and Cooperative Agreement Act of 1978 dictate 
more utilization of contracts with nonprofit organizations. A sharper understand- 
ing of when the government should go private (profit or nonprofit) in procuring 
services is fundamentally important. 

Unfortunately, Congress is confusing the issue of "contracting-out" with legis- 
lation which draws lines on DOD contracting-out which run contrary to A-7(5. 
Under the DOD Authorization Act of 1978, new broad limitations are imposed 
on acquisition by the Federal government of professional services. 

These developments simply underscore that before a proper role can be denied 
for nonprofit and for-profit private organizations, the government must under- 
stand when it should utilize private capabilities instead of building up in-house 
government capabilities. 

IV. General factual profiles of profit and nonprofit professional services firms 

In understanding how to utilize nonprofit and for-profit organizations, it is 
necessary to describe generally their evolution. Although based upon the classical 
areas of engineering, architecture and management consulting — the latter actu- 
ally an outgrowth of industrial engineering — the private profit professional serv- 



3 Presidential memorandum dated May 12, 1977. 
* Washington Star, March 19, 1978 issue. 



141 

ices sector, under the impetus of World War II, now includes a wealth of sci- 
entific, social and technological talent. All in the private sector, nil very much 
for-profit, and all essentially non-manufacturing. We estimate Unit the private, 
profit, professional services sector now encompasses over titty thousand firms 
with formal payrolls, and generates between fifteen and twenty billion dollars 
of services, about equally divided between industry and government of all kinds. 
Free enterprise exists with a vengeance in the professional services Industry. 
A quote from "The Nature of Competition" by (laire Wilcox ' serves as .1 basis 
for supporting this assertion. 

"The requirements of perfect competition are live: First, the commodity 
dealt with must be supplied in quantity and each unit must lie so like every 
Other unit that buyers can shift from one seller to another in order to 
obtain a lower price. Second, the market in which the commodity is bought 
and sold must be well organized, trading must be continuous, and traders 
must be so well informed that every unit sold at the same time will sell 
at the same price. Third, sellers must be numerous, each seller must be 
small, and the quantity supplied by any one of them must be so in s ignifi cant 
a part of the total supply that no increase in his output can appreciably 
affect the market price. Buyers likewise must be numerous, each buyer must 
be small, and the quantity bought by any one of them must be so insignificant 
a part of the total demand that no increase or decrease in his purchases can 
appreciably affect the price. 

. . . Further, there must be no restraint upon the independence of any 
seller or buyer, either by customer, contract, collusion, the fear of reprisals 
by competitors, or the imposition of public control. Each must be free to 
act in his own interest without regard to the interests of any of the others. 
Fifth, the market price, unfair at any instant of time, must be flexible over 
a period of time, constantly rising or falling in response to the changing 
conditions of supply and demand . . . Finally, there must be no obstacle to 
elimination from the market; bankruptcy must be permitted to destroy 
those who lack the strength to survive". 
Wilcox continues by stating that perfect competition ". . . does not exist, 
never has existed, and never can exist". But his concept is useful in providing a 
standard by which competitive realism can be measured. In defining pure com- 
petition as coming close to the ideal of perfect competition without attaining it, 
Wilcox is describing the situation w r hich by and large prevails in the profit sector 
of the professional services industry. 

A surprising number of these conditions exist insofar as the for-profit profes- 
sional services are concerned. Over ninety percent are small businesses, and 
the firms are ordinarily independently owned by highly trained, profit motivated 
entrepreneurs and managers whose choice it was to begin and maintain a for- 
profit professional services business. 

Even the larger firms in the profit group are small when compared to the 
manufacturing side of industry- Computer Services Corporation, for example, 
currently operates at an annual billing level of over 200 million dollars, as doe- 
Planning Research Corporation. Booz Allen & Hamilton enjoys an annual gross 
of about 80 million dollars, while Camp, Dresser & McKee and The RDM Cor- 
poration operate in the 40 to 50 million dollar range. The number of larger 
firms is small also when compared to the thousands of firms in the professional 
services industry classified as small businesses under any of the current classi- 
fication criteria. Our experience in the late sixties confirms the fact that tbere 
is no obstacle to elimination from the market. Bankruptcies among profit pro- 
fessional services firms during the period were numerous and frequent 

The fact that the output from these firms in many cases is absorbed by the 
government or the fact that the overall market is monopolistic in no way detracts 
from this freedom of choice. Also, a commonly held monolithic perception of the 
Federal Government should not detract from the realitv of thousands of service 
procurements ranging in size from a few thousand dollars to many millions. 
Specifically excluded are the many individuals who are utilized by government 
agencies as consultants at negotiated daily rates. 

During this same period, there has been an explosive growth of nonprofit or- 
ganizations which also provide a broad range of professional services. Initially 
these organizations were established under favored circumstances to fill a 



5 Compptition and Monopoly In American Industry CTXED Monograph °1 ) 10 ll 
reprinted in Dean, Joel, Managerial Economics. Englewood Cliffs, N.J. ■ Prentico"-Hall. 'inc. 



40-287—79 10 



142 

vacuum Id providing systems analyses and technical expertise not available in 
the private for-profit sector. As the private for-profit sector developed similar 
capabilities, these organizations did not lose their favored status, but simply 
continued and enjoyed a competitive advantage by virtue of Federal laws and 
policies. 

Several kinds of nonprofit organizations are in direct competition with profit 
professional services firms. First, "captive" nonprofit research institutes known 
as Federally Funded Research and Development Centers (FFRDC's) or Fed- 
eral Contact Research Centers (FCRC's) provide professional services. Th'e 
FFRDC's or FCRC's normally work principally for a particular Federal depart- 
ment or agency and receive a substantial portion of their funding pursuant 
to a long-term, open-ended master contract with the sponsor department or 
agency. These captive nonprofits also provide services for other Federal depart- 
ments and agencies, state and local governments, commercial and industrial 
clients. In 1973, there were 59 nonprofit captive FFRDC's and FCRC's, includ- 
ing RAND Corporation, Mitre Corporation and others. 

A second category of nonprofit research institutes are the "non-captive" non- 
profits such as Southwest Research Institute, Franklin Institute, Battelle Me- 
morial Institute, Stanford Research Institute and others. While these organi- 
zations' sources of funding are more diverse at least 65 percent of their income 
results from the performance of professional services for various Federal, state 
and local government agencies. 

A third group of nonprofit organizations engaged in providing professional 
services is the universities and colleges. Approximately 11 percent of the Fed- 
eral research and development budget for fiscal year 1977 ($23.5 billion) was 
allocated to research and development performed at universities. Of this amount, 
89 percent was "applied" and "development" activity, directly competitive with 
similar services available from the professional services. Universities and col- 
leges are providing professional services to commercial and industrial clients 
;i< well. 

V. Similarities in internal characteristics 

All professional services organizations, profit and nonprofit alike, are in the 
business of selling professional labor, generally to solve specific problems using 
available technology. Professional services firms, if properly chosen and utilized 
by the government managers, can substantially improve the policy maker's 
understanding of available alternatives and of the probable impact of various 
policies if implemented. The spectrum of problems addressed by these firms, 
plus the ability to use individual consultants as required, provide a capability 
and flexibility difficult to duplicate in the government. 

When the particular job for which the professional services firm is engaged 
has been completed, the expense to the government terminates. There is no 
necessity for the government to create new problems to be solved by a now 
unutilized work force. The cost to the government of acquiring the assistance 
of a professional services firm can be specifically and easily determined. Tt is 
the bottom line dollar number on the contract. There are no hidden pension 
costs, and there are no hidden costs of continuing employees on the payroll 
after the job is completed. 

In a recent study, the General Accounting Office established that profit and 
nonprofit firms generate equivalent profits when providing services to the Fed- 
eral government. This contradicts the widespread view held by many that non- 
profits are in fact nonprofit-making. A similar conclusion was reached in a 1970 
study by eminent sociologists Dr. Amitai Etzioni and Dr. Pamela Doty of the 
Center for Policy Research in New York.* Although the primary focus of the 
study was health-related not-for-profit corporations, the authors assert that 
their findings "are the same for all not-for-profit corporations". They contend 
that "existing laws and regulations governing not-for-profit corporations are 
insufficient to safeguard the underlying legitimate purpose of these corporations". 

Etzioni and Doty state ". . . omissions, ambiguities and loopholes in the laws 
and regulations governing not-for-profit corporations presently make if possible 
f or the trustees and staff of not-for-profit corporations to ongasre in a varietv of 
financial practices which brinsr them personal profits over and above fees. 
salaries and fringe benefits due them for work performed". The authors hasten to 
add that, the practices in question cannot be generally termed "fraud", but are 



8 Etzioni. Amitni and Doty. Pamela, "The Profit in Not-For-Profit Institutions," Center 
for Policv Research. New York, N.Y. 



143 

"forms of profit-making which arc at odds with the underlying rationale of no 
for-profit corporations, not as currently written in existing laws and regulations 
but as widely held and understood as Legitimate expectations by members of 

society''. 

According to the authors, such practices have not been perceived as problem- 
atic and statutory language bas remained Imprecise due in part to "the strength 

of the philanthropic tradition in America and the trust long placed in the un- 
selfish motivations of those associated with not-for-profit corporations''. 

In order to correct the ambiguities, omissions ami imprecision, the authors 
recommend : 

A revision of the law covering not-for-profit corporations to explicitly 
exclude any form of compensation of the staff other than salary or fee-i'or- 
service. 

Persons having potential "conflicts of interest" be required to sever the 
relationship in question before permitted to serve on the board or as an 
official or staff member for a not-for-profit entity. 

Penalties be enacted from any member or trustee of a not-for-profit in- 
stitution engaged in any such conflict of interest transaction. 

Where not-for-profit institutions draw on public funds, the governmenl 
regulatory apparatus should examine fees, salaries and fringe benefits as 
compared to similar institutions, and refuse to certify or recertify for par- 
ticipation in government programs those institutions providing income 
grossly above the norm. 
The marketing process throughout the professional services is uniform. In 
order to survive as an organization, the professional services firm, profit or non- 
profit, must generate a relatively constant flow of contracts or grants. Although 
organizations vary in the detailed approach to marketing, all engage in intensive 1 
customer interaction, the development of "leads", and the preparation of techni- 
cal converns of one kind or another. Thme kind of work determines job choice 
Proposals for grants and contracts vary in administrative detail, but in every 
case, include organizational qualifications, specific technical staff, a technical 
and management approach, and a price to complete the project. In previous years, 
grants used to acquire professional services were not monitored nearly as closely 
as were contracts. As the perception of profits and nonprofits merge, however, 
most Federal agencies are beginning to establish performance regulations for 
grants approaching the detail and intensity of regulations dealing with contracts. 
Personnel management among professional services firms is identical. Few if 
any professionals choose to work in a profit or nonprofit firm because of ideologi- 
cal concerns of one kind or another. The kind of work determines job choice 
in many cases, but is not relevant in terms of choosing a profit or nonprofit since 
both groups compete essentially in the same markets. Competition among orga- 
nizations for professional talent is intense, so salary structures and benefit pro- 
grams vary little from company to company. Because of the similarities in per- 
sonnel management, professionals move freely among firms primarily in response 
to demands of the job market. 

There is little difference among firms in the approach to program performance. 
A program hierarchy is established, headed by a program manager. All firms, 
with varying degrees of success, establish controls designed to permit successful 
program completion within the cost allocated in the contract or grant. All firms 
find it equally difficult to constantly charge the bulk of their professionals against 
existing contracts or grants. 

The only rational conclusion is that both types of organizations are engaged 
"ill enterprise activities in the same way. Entrepreneurs inhabit both worlds, and 
both types of organizations are strikingly similar internally. However, while 
both appear to be operating by the same internal rules, external rules and pro- 
cedures, a product of inadequate and grossly unfair Federal laws and policies, 
are strikingly different. 

VI. Disparities in external rules 

When not-for-profit research institutes compete with taxpaying organizations, 
the rules of the competition vary drastically. While the for-profit organization 
pays taxes, "nonprofit" or "not-for-profit" organizations are tax-exempt, receive 
governmental grant subsidies not available to for-profit firms, and pay reduced 
postage rates. 

More specifically, consider how private professional services firms, nonprofit 
research institutes and universities, when engaged in the same enterprise activity 
of providing professional services are treated differently under the present tax 
laws. Examples of this lack of uniformity include : 



144 

1. The blanket exclusion from the unrelated business Income tax of applied 
research work performed for governmental agencies by nonprofit research 
institutes or in the case of universities for anyone ; 

2. The inadequate guidelines defining when scientific research work per- 
formed for a private sponsor is not carried on in the public interest and is 
therefore subject to taxation, and 

3. The imprecise distinctions as to when activities are of a type ordinarily 
carried on as an incident to commercial or industrial operations and are 
therefore subject to taxation even if performed for the government. 

These and other deficiencies in the existing tax law. regulations and enforce- 
ment policies result in large amounts of income received by nonprofit organizations 
from professional services not being subject to taxation. 

An examination of the legislative history of Section 301(a) of the Revenue Act 
of 1950 ((VI Stat. 947) which first established the "unrelated business income" 
provisions of the Internal Revenue Code illustrates the fact that these provisions 
are no longer adequate. Section 301 was intended to deal with "unfair competition" 
by tax-exempt organizations engaged in commercial activities. The exceptions for 
research work were not based on a judgment by the Congress that this policy 
against unfair competition should not be extended to this particular market. 
Rather, Congress appeared to conclude that since few profit-making organizations 
were regularly performing contract research for the government at that time, 
there was no competition in research services, fair or unfair, which needed to be 
addressed. 

By 1978, the characteristics of the marketplace have drastically changed with 
taxpaying firms competing directly with non-taxpaying entities for government 
sponsored research contracts. Whatever rationale existed in 1950 for the statutory 
exceptions in the unrelated business income tax, no longer applies. 

We believe that government is the loser in its failure to bring analytical clarity 
to its use of the nonprofit. Some have argued that the government acquires re- 
search from the nonprofit at a reduced cost, but the facts simply do not support 
this allegation. 

First, almost all contracts for research and development and for other profes- 
sional services are cost reimbursement type contracts. The exemption provided by 
these two sections does not reduce the costs incurred by the tax-exempt performer, 
and the government in turn does not realize any cost savings. Second, available 
evidence indicates that when tax-exempt performers seek or accept "fees" under 
such contracts these fees are not reduced to reflect fairly the impact of the tax- 
exemption. The tax-exempt organization is likely, for the most part, to choose to 
maintain competitive price levels and thus to retain a large margin of extra 
profitability. It is this "surplus" resulting from the tax exemption which consti- 
tutes the fundamental competitive advantage accruing to the tax-exempt nonprofit 
firm. It constitutes, in effect, a subsidy from the Federal government to these orga- 
nizations, to be utilized as their governing officials determine. These revenues can 
be used for investment in improved physical plant and capital facilities, or for 
offering high salaries and fringe benefits to attract personnel. If the performing 
unit is a larger charitable enterprise, part of these revenues may also be siphoned 
off to support those charitable activities. 

In addition, the tax-exempt organization remains free to engage in unfair price 
competition in those circumstances where it perceives that such behavior may 
result in a particularly desirable contract. In short, as a result of this hidden 
Federal subsidy, the exempt organization enjoys considerable greater flexibility 
in the business environment in which both must operate. 

Congress recognized that unfair competition existed in the disparate tax treat- 
ment of for-profit and not-for-profit organizations when it inacted the "unrelated 
business income" tax provisions applicable to nonprofit organizations in 1950. 
Unfortunately, the unrelated busines income tax is extremely limited in its scope 
and largelv ineffective in eliminating unfair competition. For example, any 
research performed by a nonprofit organization for a government unit is not cov- 
ered by the unrelated business income tax. The nonprofit has excessive leeway in 
determining how much of its overhead is to be allocated to the particular activity 
which may be subject to the tax. What is research intended to be exempt is often 
whatever the nonprofit says it is. 

During the 1900's and 1970's. there has been an explosive growth in Federal 
grant programs which provide financial assistance principally to public agencies 
and nonprofit organizations. These grant programs take many forms, including 
research grants, institutional support grants, project grants in-aid. formula 
grants in-aid. organizational support grants, block grants and general revenue 



145 

sharing. These grant programs create ■ major problem for private professional 
services in that eligibility is almost always restricted to public agencies or non- 
profit organizations. These public subsidies make it Infinitely more difficult for 
taxpaying organizations to compete effectively with their nonprofit competitors. 
Beyond demonstrable financial and tax advantages which make it possible for 
the nonprofit to market its services at lower costs than taxpaying organizations, 
there is abundant evidence of government '•favoritism" in awarding contracts to 
nonprofits. A nonprofit mystique which believes that the work of the nonprofit 
must be superior since it is not-for-profit and consequently independent and pure 
is. of course, simply not grounded in fact. There are good nonprofits and bad non- 
profits, just as there are good taxpaying organizations and bad taxpaying orga- 
nizations. When both types of organizations are engaged in enterprise activities, 
then the rules must be the same at a minimum. 

VII. The Proper Role of the Monprofit 

In the absence of equitable rules governing taxpaying and nontaxpaying orga- 
nizations engaged in enterprise activity, several conclusions are apparent : 

1. Nonprofits should compete for contract opportunities rather than receiv- 
ing sole source awards. 

2. Government should he reserved about contracting with new nonprofits 
unless they represent a unique capability or resource not available from 
existing private organizations. 

3. Special analysis is required to assure that a nonprofit is evaluated on a 
basis which does not extend unfair advantages to it when competing with a 
taxpaying organization. 
The corruption of the procurement process, the blurring of distinctions, and the 
aggressive marketing of services has made a sham of an integral part of our 
pluralistic economy ; the nonprofit. This symposium is an opportunity to recog- 
nize the development of the enterprise capacity of the nonprofit at the expense of 
its original mission and to chart ways to create new rules which are fair. Success 
in this effort will assure that each tyi>e of organization is used for its highest and 
best use and fair competition will flourish to the benefit of everyone in the public 
and private sectors. 

Center for Small Business, 
Washington, B.C., November 17, t978. 
Mr. William Ciierkasky. 

Executive Director, Select Co nun it tec on Small Business, 
U.S. Senate. ^Yashington, B.C. 

Dear Mr. Cherkasky : The Council of Small Business of the Chamber of Com- 
merce of the United States appreciates the opportunity to submit, this statement 
outlining our legislative objectives and issues, so that they can be included in 
the Committee's legislative agenda for the 96th Congress. 

The Council of Small Business perceives the principal problems of small busi- 
ness to be inflation, excessive taxation, burdensome regulatory controls and the 
lack of venture capital. Legislation addressing these problems, we feel, would 
encourage the realization of a balanced federal budget, stimulate the private 
sector to eradicate severe pockets of unemployment, and promote the availability 
of venture capital for new and growing businesses. 

The small business community is overwhelmed by myriad Federal Government 
regulations and private sector policy reactions induced by federal policies and 
practices. These adverse forces present big obstacles to sustained small business 
economic development. Progress has been made during the 95th Congress in the 
areas of taxation, procurement, and product liability. But. greater efforts will be 
required during the 96th Congress to assure implementation of newiv enacted 
laws beneficial to small businesses and to continue through appropriate legis- 
lative initiatives the elimination of the remaining Impediments that hinder small 
businesses in our changing economic system. 

Leadership by the Senate Small Business Committee resulted in Congress" 
passage of LLIL 13511 (The Revenue Act of 1978) with at least fourteen provi- 
sions favorable to small businesses. This action, coupled with this Committee's 
work on H.R. 11318 C amendments to the Small Business Act of 1968) which facil- 
itates the expansion of procurement opportunities for small businesses with the 
Federal Government, will help small business. 

However, much more needs to be done to encourage small business. Accordingly, 
the Council of Small Business of the Chamber <>f Commerce of the United States 
offers the following issues for Inclusion in the legislative agenda of this Com- 
mittee during the 96th Congress. 



140 



TAXATION 

Small business continues to need incentives for capital formation through 
changes in the tax laws. In addition to the small business provisions contained in 
the Revenue Act of 1978, we urge this Committee to continue its search tor the 
appropriate depreciation formula for small business. 

DEPRECIATION 

The present depreciation provisions in our tax laws are inadequate, still tied 
to an outmoded system of useful lives, and in great need of overhaul We urge 
thai Congress substitute for the present provisions a capital cost recovery allow- 
ance system. Such a liberalization of our depreciation laws would provide greater 
flexibility for small businesses. 

Of particular interest to small business is the provision of the tax law which 
permits additional first year depreciation. In addition to the regular deduction 
for depreciation taken in the first year of an asset's life, taxpayers may elect to 
lake a ninitial deduction of 20 percent of the cost of tangible personal property. 
This extra 20 percent deduction applies only to the first $10,000 ($20,000 for 
married couples filing jointly) of investment. The useful life the asset must have 
to qualify for additional first year depreciation should be reduced and the dollar 
limit of property that qualifies should be increased to $20,000 ($40,000 for joint 
returns). 

Present law provides for depreciation methods other than straight line. The 
Council supports the retention of the existing provisions in the tax law and 
opposes changes that would eliminate or alter the present methods of fast depre- 
ciation. Liberal capital cost allowances stimulate the modernization and expan- 
sion of the Nation's productive plants — especially in the case of small or new 
businesses which have difficulty in obtaining capital for long-lived property. 

Accumulated earnings tax 

The Council of Small Business urges Congress to increase the minimum accu- 
mulated earnings credit to $500,000. Small businesses are particularly affected 
because this tax is generally applied to small closely-held corporations. The 
threat to the tax makes it difficult for such businesses to raise capital and to 
accumulate capital out of earnings. 

Operating losses 

New- businesses often experience a period of losses in their early years. The 
Council of Small Business favors a net operating loss carryback of three years 
and a carryforward of eight years. 

Rollover 

We also favor permitting owners of closely held businesses to defer the tax 
on the sale of the equity of the business if the proceeds are reinvested within n 
specific time in other small business assets. 

Overpayment of estimated tax 

Under current tax law a corporation Unit has overpaid its estimated income 
tax does not receive a refund until the end of the taxable year. It is the view of 
The Council of Small Business that refunds for overpayment should l>e made 
when they are claimed rather than at year end. 

Mature, large companies often are able to provide for their capital needs from 
external sources. Detained earnings, however, continue to be the primary source 
of capital for small businesses. Creative approaches to engender greater capital 
formation should be explored vigorously by this Committee. 

REGULATORY REFORM 

Small businesses encounter a large number of federal agencies that directly 
regulate their operations. This includes the Internal Revenue Service (IRS), 
Federal Trade Commission (FTC), Occupational Safety and Health Adminis- 
tration (OSHA). Equal Employment. Opportunity Commission (EEOC). Wage 
and Hour Division of the Department of Labor. Environmental Protection 
Asencv (EPA), Consumer Product Safety Commission (CPSC). National Labor 
Relations Board iXLRP.l Securities and Exchange Commission (SEC), and 
Labor-Management Services Administration which administers ERISA. 

Regulatory compliance is a tax that is most onerous for small businesses which 
often lack the staff needed for compliance operations. 



147 

We urge this Committee to continue its bearings and Initiatives od o,«is dealing 
with regulatory restraints that would require economic impact analyses and a 
review of agency alternatives for proposed regulatory actions 

The Council of Small Business has supported Senator Culver*a S. 1974 B 
latory Flexibility Act), and Representative Butler's U.K. 7739 <K 
Impact Act Of l!)77i which would advance our objective— to stem the ti ! 
agency rulemaking. 

We furthermore urge that this Committee continue its support for S. 2354 
(Equal Access to Courts Ad of 1977) which Is sponsored by Senators Domenid 
.•ind Nelson. This measure offers protection from financial Insolvency for small 
business dependents who are successful in meeting the challenge of government 
litigation instituted against them. The Council of Small Business supported this 
legislation during the 95th Congress as a regulatory reform initiative. 

Penalties imposed pursuant to the Employee Retirement Income Security Ac/ 
of l<)77 for nominal errors uncovered by the DOL in its regulation of pension 
and retirement plans is an area ripe for legislative relief. Many of our small 
business constituents are abandoning existing plans and urging fellow small 
businessmen not to install them. This negative reaction to excessive penalties 
(disqualification of plan i \'<<v minor errors deprives workers of retirement bene- 
fits which often are an incentive for employees to stay with a firm. 

PRODUCT LIABILITY 

This issue continues 10 affect small business more acutely than larger busi- 
es. The National Chamber is evaluating the merits of the product liability 
tax provisions of The Revenue Act of 197S. as well as those in S. 1611, sponsored 
by Senator Culver. 

PROCUREMENT 

With the amendment of II. R. 11318 ("Small Business Investment Ac! Amend- 
ments) by S. 2259 (Small Business Procurement Expansion and Simplification 
Act of 1977) much has been accomplished toward an extension of contracting 
opportunities for small and socially disadvantaged businessmen. Oversight hear- 
ings to monitor implementation of this law i> essentia!. 

PATENT POLICY. RESEARCH AM) TECHNOLOGY 

Small businesses have heen responsible for more than half of all major inven- 
tions in this century, yet small firms encounter numerous impediments in the 
federal research and development procurement process. 

This problem, combined with the scarcity of venture capital for small high 
technology companies, marks a trend away from utilizing small business inven- 
tiveness. 

We propose that legislative remedies similar to those contained in S. 2259 be 
studied to remedy the disparity between the limited use of small business 
government-funded research and development and their outstanding record of 
achievement in technological innovation. 

Moreover, policies should be developed to facilitate the flow of technical 
information regarding research, patent rights and technology, so that more of 
these data can be shared with small businesses Lack of knowledge of govern- 
ment policies in this vital area continues t () stymie small businessmen as they 
attempt to remain competitive in this arena. 

We would appreciate your considering our views, and we request that this 
letter be included in the record. 
Cordially, 

Otis L. Lee, Jr., Associate Director. 



National Ventube Capita] ..ton. 

Washington, D.C., November /:. 1978. 

Mr. William B. Cherkasky, 

Executive Director. Select Committee on smell Business, 
Washington, D.C. 

Dear Bill: Thank you for the opportunity to participate in the meeting 
terday on legislative priorities for small business in the 96th Congress NWA 
looksforward to working with you, Herb Spira and the rest of your excellent 



148 

staff to assist in reaching legislative goals that will he helpful to small business, 
tlu> venture capital climate and the economy as a whole. As you know, our Chair- 
man, Dave Morgenthaler, our President, Reid Dennis, and the entire NVCA 
Board stands ready to contribute testimony on those matters that are appro- 
priate and where we can be useful. 

As I have indicated in previous discussions and correspondence, rollover and 
the change In the approach to qualified stock options are of primary importance 
to NVCA. 

With best regards. 
Sincerely. 

Daniel T. Kingsley, 

Executive Director. 



Small Business Council, 
Denver Chamber of Commerce, 

November 17, 1978, 
Hon. Gaylobd Nelson, 

Chairman, Select Committee on Small Business, 
U.S. sen ate, Washington, B.C. 

Dear Mr. Chairman : The Small Business Council of the Denver Chamber of 
Commerce is greatful for the opportunity to appear before your committee. Over 
t lie past two years, our small business community has been developing a closer 
awareness of the efforts of your committee. We were particularly pleased with 
those efforts of the 95th Congress. It is our hope that the committee's legislative 
agenda for the 96th Congress will include those items that will continue to cause 
the pendulum of small business concerns to return to reality and thereby help 
strengthen the economic foundation of our country. 

At a special meeting of our Small Business Council yesterday morning, serious 
concerns were expressed about the precarious state of our economy. The follow- 
ing comments should serve as background for our specific agenda recom- 
mendations. 

First, is the subject of inflation coupled with predictions of a near-term 
recession. To most small businesses operating on marginal cash flows, a recession 
is better described as a disastrous depression because many small businesses will 
not survive. With these failures go jobs. Since small business is the key ingredient 
to employment, growing rates of unemployment are predictable. Compounding 
this will be competition from unemployment insurance benefits. 

Great concern was expressed in opposition to the new Social Security rules. 
Changes in Social Security deductions should be rolled back and whole Act 
restructured. Likewise, changes in minimum wage laws should be postponed. 
These are both serious inflationary issues and require immediate action by the 
Administration. 

Although opposed to wage and price controls, the concensus opinion was that 
the voluntary programs will not work. Expressed also, was a renewed oppo- 
sitions to any attempt to resurrect the Labor Reform Bill. 

With postal rates increasing 400 percent over the past five to six years, a 
concensus was that postal reform should be mandatory. 

Perhaps the more serious immediate problem to most small businesses is the 
cost of money. It was reported that one of our members was just quoted 15 per- 
cent on a commercial loan from an east Denver bank. The inequity that persists 
between the cost of capital for small business as compared with big business 
further exacerbates the problem of small business survival in a pending 
recession. 

An overall position statement might go so far as to demand a balanced federal 
budget, continuing reduction in government spending and renewed atten- 
tion to the economic climate that encourages private investment in smaller 
businesses which will stimulate new jobs in the private sector. 

Specific items for your committee's agenda are as follows : 

1. Reduce federal regulations. 

(a) Inhibit new rule-making which has had such a disastrous effect on 
small business. Reintroduce the issues identified in S. 1974. the Regulatory 
Flexibility Act. 

(b) ERISA reforms to restructure the "Prudent Man Rule" and release 
a reasonable amount of pension and profit shaving funds for investment 
in small business. 



149 

(c) Remove from agency rules the governmenl confiscation of rights to 
patents when used on governmenl purchase contracts. 
2. Rollover in capital gains, it has been demonstrated that the amount of 

total capital invested in the small business sector, as compared with big business 
has decreased in a ratio of four-to-one over the past twenty years. To help 
correct this, we ask your consideration to support capital gains deferrals 

when reinvested in small business within two years. 

•"•. Product liability. Many small businesses are living under t!;e shadow of 
bankruptcy from a potential product liability suit. Either they cannot afford 
exorbitant premiums, insurance is not Offered, or there is no means of self- 
insurance as with bi^ business. Such a threat forces an entrepreneur t<» consider 
a sell-out resulting in a further erosion of our small business sector. Some relief 
is urgently needed. 

4. Tax issues. Although there were major trains in this area in the 95th Con- 
gress, there are still some serious inequities. Consideration should be given to 
liberalization of asset depreciation. We urge consideration of the many provi- 
sions contained in U.K. 13511, and. in particular the increase in minimum 
accumulated credit to $500,000 and the provisions related to product liability 
losses. 

We favor operating a loss carry-back of three years and a loss carry-forward 
of eight years. 

It may be appropriate to introduce some innovative new legislation that would 
automatically adjust for the inflationary impact on inventories. One possibility 
might be in using the UFO method whereby inventory value could be adjusted 
to an acceptable economic index. 

Finally, we are aware of the Administration's concern for the loss of America's 
world prestige in technology and industrial innovation. A high percentage of 
our new technology comes directly from small business. We would recommend 
that the committee give careful consideration to additional means of stimulating 
new technology development and providing new incentives for research and 
development. Currently, venture capital companies are not interested in invest- 
ments less than $150,000 simply due to the cost of monitoring each program or 
company. The SBA guaranteed loan program cannot properly respond to high 
risk technology development. Solutions to the problem must lie in the area of tax 
incentives to private investors or venture capital companies. 
Respectfully yours. 

Dttane D. Pearsall. 
Member, 8U wring Commit ! 

Small Business Council. 
Denver Chamber of Commerce. 

Statement of the National Retail Merchants Association, 
Washington, D.C. 

Prospective Issues of Importance to Independent Retailers in 1970 

small business tax 

Current tax policies frequently serve as a disincentive to small business 
growth. Retailing has long advocated comprehensive review and reform of the 
small business tax structure in order to promote expansion and Increase pros- 
perity of small businesses, 'ibis is the single most important issues for independ- 
ent retailers. 

< AITTAL FORMATION 

The problem of access to capital and capital accumulation is an obstacle 
facing any small retailer who is starting up or developing his business. Con- 
sideration should be given to a now Federal loan guarantee program which 
ensures greater access to commercial loans, and reduces the gap between the 
prime commercial loan rate and ordinary commercial interest rates for qualified 
small businessmen and women. 

ESTATE TAX 

Small business owners are disadvantaged by the provision ,,f the 1976 Tax 
Reform Act which requires the carrying over of the basis of inherited property. 
Previous law allowed this to be stepped up to the fair market value at the time 
of death. This hinders the flexibility of a business owner's surviving family. 



150 

XltMA will put its full support behind legislative efforts expected this year to 
correct this situation. 

MINIMUM WAGE 

Because the retail industry is highly labor intensive, payroll expenses repre- 
sent by far, the largest single expense item, constituting approximately 60 
percent of net operating costs as an overall average for the industry, and 
even more for small stores with annual sales of under $2 million. Because the 
industry is also characterized by traditionally low profit margins, higher mini- 
mum wages inevitably force increases in consumer prices and necessitate a 
reduction in the number of employees. Because of the grave inflationary impact 
which minimum wage increases have on the economy, NRMA advocates and 
is working to achieve a posti>onement of future, scheduled minimum wage in- 
creases, mandated by the 1977 Fair Labor Standards Act Amendments. 

LABOR REFORM 

Opposition to the Labor Reform Act, which would have allowed unions to 
expand their size, power and bargaining strength, unified small and large re- 
tailer alike and accomplished defeat of this legislation in 1978. As one of the 
largest, unorganized industries in the nation, retailing would surely have 
been a prime target of new organizing drives. That threat remains, however. It 
Is a virtual certainty that similar legislation will be introduced early in 1979. 
NRMA considers this issue to be a top priority and will commit its full resources 
to defeat this legislation once and for all. 

SOCIAL SECURITY 

The need to restore the fiscal integrity of the Social Security system recently 
necessitated a substantial increase in Social Security taxes to be borne equally 
by employer and employee. This concept of parity of contributions was an idea 
which the retail industry strongly advocated during Congressional action on the 
legislation. Nevertheless, the increases have placed a heavy burden on the highly 
labor intensive retail industry. Since the first increase became effective, how- 
ever, considerable momentum has been generated in Congress for a reduction or a 
rollback in Social Security taxes. Most likely this would require the use of general 
revenue funds and as such will demand careful and thorough evaluation. 

NATIONAL HEALTH INSURANCE 

Although the retail industry generally supports the concept of national health 
insurance, there is a consensus that the inflationary impact of a comprehensive 
program at this time would be unwise. If financed from employer taxes, such a 
plan would establish a nearly insurmountable financial obstacle for many inde- 
pendent retailers. Moreover, the industry believes that no national health insur- 
ance program should go beyond insuring against illness or injury which imposes 
so-called "catastrophic" costs on U.S. citizens. 

CRIME AND SECURITY 

Small merchants are especially vulnerable to the continued rise in crime — 
especially to theft. Consideration should be given to such measures as special 
government-financed theft insurance at reasonable rates, and to national initia- 
tives for the development of improved state laws to deal more effectively with 
crimes against merchants. 

SMALL BUSINESS IMPACT STATEMENT 

XRMA strongly advocates legislation which would require a "small business 
impact statement" or a thorough assessment of the potential effects which pro- 
posed legislation or Federal regulation would have on small business. Such legis- 
lation should weigh the additional costs, the effect on competition, the amount 
of time and expertise which would be required of small businessmen and women 
should a proposed law or regulation go into effect. 

PAPERWORK 

Coping with the increasing burden of hundreds of Federal forms has become 
a nearly intolerable burden for independent retailers. Federal paperwork re- 



151 

quirements are not only a deterrent to effective competition, bul add significant 
costs to retail operations — costs which must he passed directly on to Consumers. 
NRMA actively supports paperwork reduction and the elimination of duplicative 
Federal forms. 

COMMERCIAL CREDIT REPORTING REFORM 

Id making a decision to grant or deny credit, commercial credit reporting 
/inns often collect and evaluate personal information about small businesses. I'n- 
like consumers, the businesses about which the information is collected have no 
protection from unfairness in recordkeeping, nor do they have any authority to 
see the credit report or question the propriety of the information collected. For 
these reasons, NRMA strongly advocates reform of commercial credit reporting 
practices. 

POSTAL SERVICE 

The retail industry is dependent on a sound, efficient national postal system 
for an orderly method of communications. Recently, however, postal operations 
have been characterized by an erosion of service and an increase in cost and 
unreliability. Businesses which once relied heavily on the Postal Service for the 
transmittal of virtually all communications find themselves today unable or 
unwilling for practical business reasons to contend with the inevitable delays 
which have become synonomous with USPS service. NRMA will continue to press 
for lower postal rates and more efficient service. 

CREDIT 

Retailers are intensely concerned with the sheer volume and immense com- 
plexity of Federal credit laws enacted by Congress during the past several years — 
and even more concerned with the literally incredible mass of detailed regulations 
issued by the Federal Reserve Board to implement those laws. The problems of 
complying with the ever-growing mass of credit regulations are compounded by 
two other considerations — civil litigation concerning basically technical devia- 
tions and the presence of an even larger body of state laws and regulations in 
the consumer credit area, many of which are substantially the same as the Fed- 
eral requirements. These complex regulations have especially adverse conse- 
quences on small businesses, and generally far-reaching anti-competitive as well 
as anti-consumer results. 

score/ ace 

The Service Corps of Retired Executives and the Active Corps of Retired 
Executives, SCORE and ACE respectively, are ongoing programs of the Small 
Business Administration which seek to utilize the knowledge and experience of 
both active and retired executives to assist small businesses overcome obstacles 
to their growth and prosperity. NRMA supports these programs and encourages 
its members to take advantage of either SCORE or ACE or to volunteer as a 
counselor for other small businesses. 



Statement of Wendell O. Metcalf, International Council for Small 
Business, Washington, D.C. 

FOR MEETING WITH STAFF OF THE SENATE SMALL BUSINESS COMMITTEE, 

NOVEMBER 16, 197 8 

The primary purpose of the International Council For Small Business (form- 
erly the National Council For Small Business Management Development), 
throughout its 21 Fears of existence, has hern to stimulate its members to assist, 
through managerial development, small businesses to operate more effectively 
and efficiently. The basic objective is continuous progress in all phases of man- 
agement developmenl for small business through education, research and a free 
exchange of ideas. While the Council believ< s t' at financial assistance and aid In 
obtaining Government contracts are most helpful, these types of assistance are 
short-lived if the management of the small business is poor. 

For this reason we have a particular interest in the .-mall business develop- 
ment centers for which the extension of a pil im was proposed in the 
omnibus small business hill (H.B, 11 145), Although the omnibus hill 
by the President, we understand that Title II on Small Business Development 



152 

Centers was one of the Least controversial parts. We believe a separate Mil on 

this issue should l>e introduced to the next Congress. 

Education and training can be made more effective through the evaluation of 
pertinent research. Kvaluat ion should be made of the methods of teaching efficient 
management to small business managers. A continual search for improved meth- 
ods is needed. For such research we believe that Government funds, carefully and 
wisely administered, would he beneficial, Among the topics suggested for possible 
research by the Council's Research Committee are : 

Determination of Educational Needs for Small Business Owners. 
Evaluation of Different Methods of Management Training for Small Busi- 
ness Owners. 

Case Studies of Successful Small Businesses I What does the successful 
businessman do that the unsuccessful one does not do?) 
Use of Part-Time Help by Small Business Enterprises. 

Employee Stock Ownership Programs (BSOPs) as a Source of Equity 

Financing Cost Reduction in Small Business Firms. 

The Council's Research Committee recommends that l>efore subjects are 

seriously considered as research projects they be checked with small business 

owners. This would help to preclude the expenditure of time, effort and money on 

projects which could be of only marginal value to the small business sec-tor. 

At this time we are especially concerned with the effect of precarious economic 
conditions on small businesses. High interest rates, high prices and high wages 
wiih a tightening in consumer demand are more devastating to small businesses 
than to large. Some of our members believe that a foreclosure moratorium for 
small businesses may become necessary. 

Certainly Congressional hearings and/or research should be conducted on prob- 
lems facing small business as a result of inflation, recession and the energy crisis. 
The object of such hearings and research would be to develop legislation and 
other means to help alleviate the problems. 



Statement of the Association for Advanced Life X'nder writing 
program proposals for u.s. senate select committee on small business 

By letter dated October 11, 1978, Senator Gaylord Nelson requested proposals 
regarding what the Senate Select Committee on Small Business should consider 
during the 90th Congress. The Association for Advanced Life Underwriting 
(A ALL) proposes that the Select Committee on Small Business take an active 
role in the field of pensions and retirement planning to represent the interests of 
small business in those areas. 

A brief summary of our more specific recommendations are indicated below. 

J. Legislative and regulator}/ activity should he monitored carefully 

In a fast-moving area like pensions and retirement planning it is essential that 
the Select Committee on Small Business continually be up-to-date on the legisla- 
tive and regulatory activities in the field. Failure to monitor these activities 
carefully can result in either new legislation or regulations that can be highly 
detrimental to small businesses' ability to hire and retain competent personnel. 
A recent example was the proposed deferred compensation regulations issued by 
the Internal Revenue Service on February 3, 197S (Prop. Treas. Reg. Section 
1.61-10) that Would, in all probability, have severely restricted small businesses' 
ability to offor deferred compensation to employees. The impact of these regula- 
tions would nrobnbly have been less severe on the abilitv of larere corporations 
to provide deferred compensation. Fortunately, these regulations have essentially 
been reversed by Congress as part of the Revenue Act of 19T Q . 

In order to carry out this very important function we would suggest that 
the Committee consider employing either a full-time staff member or utilizing 
an outside consultant to help the Committee monitor developments in the field find 
to assess th^ importance these developments may have on small bnsinsses. With- 
out this type of concentrated attention the Committee's effectiveness will be large- 
lv undermined. 

FT. EKTK<\ arras of interest 

While the Revenue Act of 1978 and other legislation at tho enrl of the 95th 
ConfiTeSH brought some improvements in ERISA, the difficulties crente-1 by 
FRTSA nre still nresont and Congress should, in the next two years, undertake a 
revision of FRTSA to streamline i^s application and reduce the adverse impact 
that it has on retirement planning, especially for small businesses. 



163 

A few of the areas that should he focused upon in tiiis effort Include the 
following: 

1. PBGC LIABILITY 

ruder ERISA there is ;i substantial problem with potential liability and 
premium cost for defined benefit plans. The PBGC's own studies Indicate a 
potentially dramatic increase in PBGC premium costs. Larger companies are bet- 
ter able to hear substantial premium cost increases th.in are small companies. 
In addition, most problems with underfunded plans appear to be with Larger, 
union-negotiated plans. 

Careful attention should he given to the problem of pension liabilities and 
premium costs for smaller companies. Consideration might even ho given during 
the 96th Congress to establishing a special lower premium rate for smaller 
businesses, especially insured plans which essentially already have guaranteed 
benefits, since the PBGC insurance protection in those plans is largely duplica- 
tive. Insured plans are predominantly used hy smaller employers. 

2. REPORTING AM) DISCLOSURE REQUIREMENTS 

Wlide the Revenue Act of 1978 and the Congressional approval of Reorganiza- 
tion Plan Xo. 4 made some improvements in the reporting and disclosure require- 
ments of ERISA, there is still substantial need for improvement in this area. 
Specifically, the agencies should have more flexihility in establishing the report- 
ing and disclosure requirements. ERISA would he substantially improved if the 
specific ERISA statutory requirements on reporting and disclosure were deleted 
in favor of a general delegation of authority to the appropriate agency to pre- 
scribe the necessary information. More specifically, we favorably view efforts 
to repeal the requirement of the summary annual report (as would be required 
under section 223 of S. 3107) in favor of making the annual report available to 
participants. This avoids substantial cost and hurdensome paperwork without 
reducing the essential availability of information for those interested. We also 
feel that an important improvement would he simplification of the summary plan 
description requirements. Presently, most companies are utilizing attorneys to 
develop summary plan descriptions because of the complex nature of the docu- 
ment, which necessarily increases the cost and decreases the desirability of 
ret i rement programs. 

3. MULTIPLE JURISDICTION PROBLEMS 

We applaud the recent efforts to reduce the multiple jurisdiction problems of 
ERISA hy the Congressional approval of Reorganization Plan No. 4. It is AALU's 
opinion that Reorganization Plan No. 4 presents the best available solution to 
the multiple jurisdiction problem created by ERISA and this program should 
he permanently instituted through a statutory revision of ERISA. 

In addition, we wish to draw attention to the potential Securities and Exchange 
Commission involvement in this area through the decision in Daniel v. Interna- 
tional Brotherhood of Teamsters. If affirmed by the Supreme Court we would 
strongly support legislation to reverse the involvement of the SEC in the pension 
field. 

4. MASTER AND PROTOTYPE PLANS 

Under legislation introduced last Congress (S. 3017) a proposal was made that 
a special and prototype program he instituted to essentially make the adoption 
of qualified plans less burdensome and expensive for smaller companies. We 
applaud these efforts and would strongly support the concept of such a master 
and prototype program. Unfortunately, the program suggested in Title IV of 
S. 3017 had substantial defects, but the concept is valid and should he pursued. 
In order to he effective, such a program should he broadened to apply to both 
defined contribution and defined benefit plans. The Sponsorship should he in- 
creased to permit organizations such as plan consultants to offer such programs 
and the liability of sponsors should be more carefully circumscribed. 

5. IMPROVEMENT IN VESTING REQUIREMENTS 

ERISA statutorally mandated alternatives vesting schedules for all qualified 
[dans. The Internal Revenue Service subsequently supplemented to this by re- 
quiring faster vesting schedules in many situations. 



154 

AALU supports efforts to return to the statutory vesting schedules prescribed 
by ERISA, especially for defined benefit plans. ERISA placed a heavy burden on 
defined benefit plans that has resulted in a trend towards the creation of defined 
contribution plans (such as profit snaring and money purchase plans) instead 
of defined benefit plans. This is especially true for smaller businesses. AALU 
feels that this is unfortunate since defined benefit plans have Unique features 
that cannot be duplicated with defined contribution plans. 

AALU believes that this trend towards defined contribution plans might be 
slowed or offset if defined benefit plans were permitted more liberal vesting, such 
as the statutory alternatives prescribed in ERISA (without the faster vesting 
required by the Internal Revenue Service). In addition, other efforts should be 
made to increase the viability of defined benefit plans, especially for small busi- 
nesses, by minimizing the liability and costs of such plans. 

6. FUNDING REQUIREMENTS 

Another area in which defined benefit plans might receive some help, es- 
pecially for smaller businesses, is in connection with the funding requirements 
of P]RISA. The goal of requiring plans to be adequately funded is laudable and 
AALU believes that it is an entirely appropriate provision of ERISA. However, 
while larger businesses often have cash flows that permit them to maintain the 
necessary funding requirements of ERISA even in a recession, for smaller busi- 
nesses these funding obligations can be very burdensome and can often drive 
a company away from a denned benefit plan. The exemption procedure provided 
by ERISA is cumbersome and expensive. 

AALU supports the concept of providing greater flexibility in the funding 
requirements of ERISA for smaller businesses. The funding requirements should 
be carefully considered to avoid excessive latitude since it is desirable to insure 
that the plan is adequately funded. However, overly restrictive funding require- 
ments have the result of eliminating any pension benefits at all for employees, 
which we feel is less desirable than having a plan maintained with more flexible 
funding standards. 

7. DEDUCTIBLE EMPLOYEE CONTRIBUTIONS 

The Senate-passed version of the Revenue Act of 1978 contained a provision 
that would permit deductible employee deductions to qualified plans. While this 
provision was deleted by the Conference Committee, AALU feels that this would 
be an enormous incentive to spur retirement savings by employees and thereby 
improve the retirement income status of retirees generally. While such a plan 
has a significant revenue cost AALU believes that the social impact of the pro- 
gram is so desirable that the revenue cost should be accepted and that such a 
program should be actively pursued. AALU believes this would be particularly 
important for smaller businesses since it would provide an important incentive 
for the adoption of qualified plans. 

777. Age and sex discrimination 

Legislative and regulatory activities in connection with age and sex discrimina- 
tion have recently been receiving considerable attention. While AALU supports 
the concept that employers should not discriminate on the basis of age or sex, 
we are particularly concerned with the effects that some of the proposals may 
have on providing retirement benefits. In some cases we believe that the existing 
ERISA and Internal Revenue Code requirements are not adequately considered 
by the agencies and Congress when focusing on the narrow issue of the desira- 
bility of non-discrimination on the basis of age or sex. These programs can be 
highly disruptive to employers who may be forced to undertake substantial cost 
in redesigning plans and providing new benefits. For smaller companies especially, 
these increased costs can be so significant that they may drive employers out 
of providing certain types of benefits. This is socially undesirable and we be- 
lieve that the Committee should take an active role in insuring that small busi- 
nesses are not adversely affected by proposals regarding age and sex dis- 
crimination. 

o 



UNIVERSITY OF FLORIDA 

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